Many small
business owners depend heavily on the
financial reports provided by their
bookkeepers and accountants. Software
programs such as QuickBooks and Peachtree
allow the small business owner an affordable
solution to their accounting and bookkeeping
system. They also allow an easy door
for the fraudster by manipulating entries,
creating multiple company files with
different data and going back and changing
financial reports previously created.
Yes these software systems also have
controls in place, if they are used.
But, in the real world of small business
bookkeeping, the owner allows the bookkeeper
or accountant to have full administrative
access to everything created in these
accounting systems which in return voids any
controls at all. What concerns me the
most is the “as a matter of fact” belief
that the small business owner have to the
reports generated from these programs.
A small business owner recently asked me
“Aren’t the reports that I get in QuickBooks
correct?” When I explained that unless
you are reviewing the source documents that
generated those reports, you will not know
how “correct” those reports are and that
they can be easily manipulated to hide
fraud.
Case in point
– a Construction company in Florida recently
suffered a $1.5 million dollar fraud loss at
the hands of their controller. Their
controller was given free reins over the
entire accounting process and in doing so he
generated illegal wire transfers from the
business account to his personal bank
account. These transfers were large
dollar amounts so one may wonder how in the
world the owners could miss such an
atrocity. Easy…. They never
looked at their source documents and did not
have any internal controls in place.
The fraudster generated phony entries into
the bookkeeping system using an existing
vendor’s name. This vendor always had
high dollar invoices due so when the owner
would only review the financial reports
provided by the controller, they
assumed that the data they
were reviewing was correct.
Unfortunately they assumed wrong. The
fraudster committed the ultimate billing scheme that lasted three years.
The sad part
about this case is the fraud started
immediately when the controller was hired.
The owners of this construction company
trusted the accountant with everything.
They hired this individual through a temp
agency, and thought that the temp agency did
a complete background check. Well,
they were wrong again. The temp agency
only completed a state background check and
the fraudster was able to fall through the
cracks. This controller had a criminal
record of fraud in another state and was
missed in the background check because the
temp agency did not include all states.
The fraud was finally discovered over three
years after the controller was hired when
the owner was reviewing the online banking
and noticed a large wire transfer.
When he called the bank to question the
transfer, he immediately thought the bank
made a mistake. After further review,
the owner noticed a trail of wire transfers
dating back but didn’t believe that the
controller was responsible. The owner
did fire the controller for incompetence,
but did not know the controller was the one
responsible for the fraud until a forensic
accountant was hired to investigate the
matter further. After discovering the
$1.5 million dollar fraud loss and the tens
of thousands of dollars in legal and
investigation fees, the construction company
is limping along trying to survive.
As a small
business owner it is so important that you
don’t stick your head in the sand and just
go along with business as usual.
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Julie A. Aydlott, CFE
Business Fraud Prevention, LLC
970-776-8395
