Lesson Learned: Dummy Vendors and a Cover-up
By: Robert F Cummings
Consulting CFO, Connecticut
SBA * Consulting LTD
Internal controls are not for big business only. I learned the hard way. I
was the Controller CFO for multi-site property management firm. Our net
revenues were approximately $4 million. Our project revenues were in excess
of $20 million. The reason is that we received funds and paid bills on
behalf of different owners and governmental agencies.
The branch offices always complained that they could not pay for time
sensitive bills like food and delivery charges and office supplies by going
through corporate. So to combat that problem, we gave them small checking
accounts that required two (2) signatures. Sounds good, right?
Well after two years, it appears that we were getting systematically drained
to the tune of $3,000-$5,000 per month in small charges. No charge was ever
over $1,000 so the external accountant auditors never questioned the
propriety of any of the branch expenses.
The records all looked good and the checks were always approved and signed
properly. Here is what was going on. The branch assistant would have the
manager pre-sign some checks when he was going out of town. She added her
signature to those checks and paid a fictitious (dummy) company. The
company put on the checks was the Office supply house in pencil, copied,
sent to corporate. The original check was erased the payor changed and
cashed by the rogue employee.
We never saw the checks returned because they were destroyed by the employee
with the returned bank statement. Since the amounts were small relative to
the overall expenses, they did not look out of line on the corporate
consolidation. An alert accounts payable clerk noticed that the delivery
charges were to a utility where the employee’s relative worked. Since we
did not business with the utility, the employee was questioned and
confessed.
What internal control mistakes were made and how could this have been
prevented?
1.) Two signatures? Fine, but the manager negated this control by
pre-signing checks.
2.) The bank statement should be opened and examined by a supervisor with no
check or accounts payable access. Original cancelled checks should be
examined, if possible for changed numbers and payers.
3.) Corporate should have insisted on seeing original invoices and cancelled
checks. The copies covered up the malfeasance.
Lesson Learned: Take the time to periodically examine your procedures and
checks and balances. Your CFO and external CPA are knowledgeable in these
areas, but you, the owner know what makes sense and what may be out of
control. Take the time to check the details and work with your CFO. If you
do not have a CFO, consider getting one part time to help you guide and
manage your business.
Feel free to distribute this newsletter to your business associates and
clients.
