Do you believe what your financial reports tell you?

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. 

Look at your source documents to confirm what reports are legitimate and what reports aren’t even close to the real picture of your business finances.  Set up accounting controls so that you are on top of everything, otherwise this story could be you.
 
Julie A. Aydlott, CFE 
Business Fraud Prevention, LLC
970-776-8395