Fraud Prevention Tip: Always Poke Around Your Books

When companies start the CEO or business owner is the one signing all of the checks. That’s just the nature of a start up and a small business.

But after a company grows and other people – CFO, controller, auditor, etc. – are put into the position of check signer, the CEO or a majority shareholder should double-check what’s getting paid.

Just look at a ledger, the checkbook or Quickbooks and see where money is going. Ask questions about that money. How often are we paying for X? What does company Y supply us with? Poke around the books and ask questions.

Silly Expenses

Even if you don’t find fraud, you’ll likely discover unnecessary expenses. I would say the latter is in fact more common in these cases. The reason is that people in Accounts Payable aren’t always informed when a piece of leased equipment is sold or returned or when the paper supplier wasn’t just changed but the first supplier was canceled. That’s because a lot of payables and other bills are just put on autopilot. They’re not checked every month or even every year.

I can’t count the number of times I’ve gone through a company’s expenses line by line, questioning everything with the CEO and the check-signer, and found thousands – if not tens or even hundreds of thousands – worth of expenses being paid that didn’t need to be paid. What a difference that makes to the bottom line of any business, much less one that hasn’t turned a profit in two years.

In one notable case, this routine check uncovered some major fraud.

Un-Silly Fraud

We discovered the fraud while doing a sort in an Excel spreadsheet on all of our vendors’ addresses; we were just trying to figure out freight costs and where we could save money. What we stumbled upon were two vendor companies: one in California and one in Indiana. Each was doing business with a stationary store in Chattanooga, which is where our home office was.

It would have made sense that there were vendors in California and Indiana to attend to our subsidiaries, but what didn’t make sense is that we were sending checks to these companies at a PO Box in Chattanooga – which, I reiterate, is where our headquarters was.

It turns out that the controller had created dummy vendors, theoretically for our subsidiaries in California and Indiana, and he was cutting checks to these dummy vendors for random amounts between $50 and $100 to a PO Box in Chattanooga. He would then go collect all of these checks and cash them in the name of these dummy vendors.

That’s a series of very small transactions that an auditor would never find even if he regularly dipped 20% below his “check everything” number. As a result, over the course of ten years this controller stole over a million dollars.

And again, we only discovered this because the CEO and I were poking around in the books trying to come up with useful ways of extracting unique, money-saving information. What hit us was something suspicious, and that’s why I always encourage you to look into the suspicious.

Slightly Silly Fraud

Another time I was working on a book store that had switched who it was banking with and who held its credit cards. But one of the credit cards wasn’t canceled – a Discover Card – and because it was so routine to pay off this Discover Card, the controllers just kept paying it. No one asked and no one thought about it. As it happens, the guy whose card it was just paid off his entire mortgage on the company (until I got there).

Just do a routine check through all of your transactions and payments. You’re bound to find some juicy things in there.

How often do you poke around your books?

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