My Most Interesting Case of Fraud to Date – a Guest Post by Vic Taglia

Lee has some amazing fraud stories that never cease to crack me up. To emphasize his consistent advice to watch the back door and other openings for theft, I want to share that store of the most interesting fraud I’ve ever uncovered.

A General Feeling of Unease

I was working at a company at which we needed to replace the retiring finance director of our English subsidiary. It was a small company with about a dozen employees.

Our auditing firm recommended an experienced finance executive from one of their other clients. He was well-regarded, active in his church, married with two children and had a stable work history and good references. The interview went well, and he spent a few days with our retiring finance director to get acclimated to our business.

Over the next few months, the managing director (MD) mentioned some specific minor problems to me regarding the parent company’s CFO, as well as a general feeling of unease. I investigated the specific problems on my next quarterly trip and confirmed that there was something just a little bit off. I reiterated our policies and requirements with the new hire, and the MD and I agreed to watch our new finance director closely over the next few months.

Champagne’s On Us!

Our new guy took a long weekend the next week, and his phone calls were covered by our receptionist. When she got a call from a liquor store asking about payment for a case of champagne, she went to the MD and asked what was going on.  (The company was running on the ragged edge of profitability and had reduced spending significantly in the past year. Thus, cash was at the top of every conversation I had with the MD, and we were not buying champagne.)

On his return, the finance director told the MD that he had bought the champagne through the company so he could avoid VAT. The MD told him to reimburse the company the full amount, including VAT, and to go home pending further notice. The MD called me and we scoped out an investigation plan for him to start while I flew to England.

Sophisticated Theft for Sophisticated Parts

In addition to trying to get the company to pay for a case of champagne, we found that he had paid personal bills with company funds (charging inactive vendor balances) and even directed a customer to pay the balance they owed to his personal American Express bill.

Our criminal finance director picked his targets very carefully: inactive accounts, unsophisticated customers, etc. In total, he stole about ₤20,000 in less than three months.

We had him arrested and pursued through the courts for theft and other charges. Upon his conviction, the judge was about to send him to jail for several years when suddenly his lawyer provided doctors’ notes specifying that his client had stolen from us in order to pay his out-of-pocket costs for a sex change operation.

While National Health Service paid most of the costs of the operation, our finance executive needed money to set up a household separate from his wife and children.

Mercifully, the judge ordered merely restitution (which would take about 50 years, without interest) – and no jail.

We didn’t even get the champagne.

Ever seen any strange cases of theft or fraud? Care to share in the comments below?

Want to read about preventing fraud in your business? Click HERE.

It’s Always the President’s Fault, a guest post by Vic Taglia

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

No, I’m not talking about Mr. Obama.

Twenty-five years ago I got my first CFO job with a $50 million manufacturer/distributor of electrical products. Howard, the company’s president, had enjoyed over 15 years of success with two shareholders. A public company based in California owned 20%, and a family-controlled equity fund owned the remaining 80%.

Things Went South

But the last year had been difficult for Howard. A large competitor had awakened from his slumber and began aggressively competing in Howard’s market. Another competitor had fine-tuned his operation and began capturing Howard’s business.

Howard’s management team, three sales/marketing types, the old CFO and the VP of operations were in conflict. The company was running out of stock and missing delivery dates.

The operations staff blamed the sales and marketing team for bad forecasts, and the sales and marketing team blamed operations for not manufacturing to the plan – and each other for bad marketing or bad sales.  The VP of operations was hit by a rental car bus at the airport and was unable to work. The CFO quit.  Howard’s strength was sales, and he treated the VP marketing as the heir apparent who could do no wrong.

After my first week on the job, the California company declared it wanted to sell its share of the business. The family fund responded that it would encourage a management-led leveraged buyout (none of these folks thought to mention any of this during my recruitment, of course.)  Howard saw this potential liquidity event as an opportunity to control his company.

No One to Blame But the Boss

Unfortunately, recent events and management turmoil precluded the finding of necessary financing. After three months of searching for financing, the family fund terminated Howard. I asked the company’s chairman why he let Howard go after 15 successful years and one not-so-good year. He replied that his only regret was that he didn’t fire Howard earlier.

He explained that a company’s president is responsible for everything at the company. Howard should have been prepared for the big competitor’s attacking the market. He should have anticipated the smaller competitor getting better.  He should never have played favorites.

I asked how it could be Howard’s fault that the VP of operations was hit by a bus. He said Howard should have ensured that there was adequate staff at lower levels.

In all successful organizations, leaders who do not deliver the results are fired. Baseball managers who lose games, generals who lose battles, captains who lose boats and business managers who lose money are all fired.

Or at least they should be.

In World War II, it was expected that American generals who lost battles lost their commands. What you saw in movies, such as Patton and Twelve O’clock High, was based in truth. There were no lucky or unlucky generals, only winners and losers. And the losers were relieved and sent home.

When your business is in trouble, you need to replace management.  If you don’t, the next owner will.

Want to learn about good management so you can avoid being like Howard. Then click HERE.

What are your experiences with failing management?

Life’s Lessons and Surprises: 18 Months at Life University

Life is full of surprises, and as a business leader, you can’t let those surprises turn your business upside down. If you learn to manage them as part of your business, expecting that they will be there and creating contingencies for them like emergency cash, a fully stocked resume and interview line should you need some fast hires, good networking, a solid relationship with your banker and so on, then you will likely survive when they surprise.

In 2003/4, I did a turnaround for Life University, the award-winning chiropractic institution in Atlanta, GA. Life had a lot of lessons about the power of surprises.

Life’s Problem

After achieving an all-time high enrollment rate and setting the standard of excellence in contemporary health for its chiropractic undergraduate and masters degree programs, Life University was challenged with a loss of accreditation and defaulted on $35 million in secured bond debt.

Our Solution

Upon becoming the Director of Refinancing and CFO, we redid the budget based on declining attendance and negotiated a forbearance agreement with the Trustee and Bondholders. We also sold assets and refinanced others while the board searched for a new president.

The Outcome?

Within 18 months Life University’s cash flow was stabilized, accreditation was granted and the bond debt was refinanced. As part of the long-term plan, the school retained a President and Chief Financial Officer from a competing school. Victory was ours, and we won the Non-profit Turnaround of the Year Award in 2004 from the Atlanta Chapter of the Turnaround Management Association (TMA).

What I Learned from Life?

Professionals need to hire consultants and advisors who have different skill sets than their own. When professionals go outside their sweet spots they often make mistakes or don’t consider all the issues. Business is not the forte of all professionals – and it doesn’t have to be. Bring in business people to do business.

Life Always Has Surprises!

There are always surprises and things you didn’t account for. At Life, the CFO had a heart attack and bypass surgery, and without him we couldn’t find all of the documentation or understand the cash flow budget.

This created issues with the bondholders because a key member of the management team had been changed. Then, six months in, the president was gone, too.

A new president and a new CFO do not breed confidence to lenders.

What You Can Learn from Life

Be prepared for unfortunate events: heart attacks, death, personal tragedy, community strife. These things are part of life, and as a business leader, you have to have contingency plans in place to know how you would operate should the unthinkable occur.

Ultimately, in this case – and many others – communication solved these problems. Through extensive meetings, we got support in a forbearance agreement, which gave us time to hire a new president and to show results from fund-raising efforts.

Always have open communication.

The spirit of the chiropractic staff was great. They were committed to their university and seeing it survive. Anything I needed from them I got. Being part of a team that believes in the cause is a great thing, and in a crisis it’s very important to return to core values and purpose and to be able to lean on them.

Parting Words of Wisdom

This was a wonderful, award-winning turnaround. In turnaround management – as in business – there are always surprises. It’s your job not to let those surprises undermine your goals, but to deal with them as part of a business day.

What surprises have you encountered in business? How did you deal with them?

For Fraud Prevention Month, Prevent Some Fraud

March is Fraud Prevention Month, and as far as I’m concerned, that’s a great thing to spread awareness about.

I see fraud all the time. Here’s one of my more recent forays.

So Much Fraud. So Little Time.

In my experience, 75% of fraud is committed by people who have never been caught before. That means the person or people in your business who are likely to commit fraud are not going to come up when you do criminal background checks.

Oh, and don’t forget about family. Family members commit fraud all the time. When you employ family, resentment could lead to stealing, and there’s always a certain sense of entitlement that facilitates matters.

I’ve even seen a CFO who was stealing methodically, and when I looked back I saw that his father had been the previous CFO who was stealing methodically in the exact same way.

Stupid Fraud

Most of the fraud I see is idiotic.

I’ve seen people with folders on their desktops that may as well have been labeled fraud. When I opened the folder there was a spreadsheet inside with every single perpetration.

I’ve seen a CEO who had the account statements from his bank in the Grand Cayman Islands sent right to the office.

I’ve seen a woman who everybody loved and who worked as the payroll processor at a company for 25 years check out of the hospital 24 hours after a heart attack only to process payroll and return to the hospital hours later. She never missed a payroll in 25 years. And as it turns out, neither did the three fake employees she had on the books whose social security cards and accounts she controlled.

And people love to spill the beans. I’ve had people shove USB keys filled with data and file folders and so much more under the door of my hotel room in the middle of the night.

How Do You Minimize and Catch Fraud

Be out of the ordinary.

Fraud happens when complacency abounds. People steal a little, maybe even by accident, and realize that no one was looking, noticed, said anything or seemed to care. So they took a little more. And then a little more. So mix things up.

As I’ve mentioned in another post, I once caught a multi-million dollar fraud by holding a BBQ at 1 a.m. for a 24 hour overnight crew. A guy came up and just told me about something that didn’t make a lot of sense to him. I only caught the fraud by doing something out of the ordinary. When’s your next late night BBQ scheduled for?

Always force your CFO to take an annual two week vacation in which he’s not allowed in the building and he’s cut off from business email. Sit at his desk and do his job, and you’ll be amazed at what you find.

Fraud also happens by working outside the known bounds of your auditors’ checks. If auditors only look at transactions above the set limit of $5000, then once every few months check everything below $5000 also – that’s where all of the fraudulent checks will be. You’ll discover that you’re still paying for leased equipment you’ve long since sold or that you’re paying rent on property you no longer own.

You’ll find all kinds of things. Just do what’s out of the ordinary.

Help prevent fraud in your company and raise awareness of fraud during Fraud Prevention Month and every month hereafter.

What kind of fraud have you found?

P.S. If the answer was none, you’re not looking hard enough.

“If the Alligators are Biting, It’s Too Late to Drain the Swamp”

You may have heard this saying before:

“If the alligators are biting it’s too late to drain the swamp.”

Keep this in mind while running your business. Doing so can affect not only profitability but also your very survival.

Here are a few examples of when the alligators start biting:

1. Consider the sales manager who is not producing what you’ve come to expect from him; you notice a decline in sales and even a disruption to the team. He should either be refocused or fired. Now your revenue and profits are down. If he handled your largest accounts and the competition has now stolen them from your company, you’ve been bit by alligators.

2. Your CFO is constantly late with financial statements, and the bank is growing concerned. You then discover after months of frustration that he has personal problems that have affected his performance.  Now the bank is concerned about your ability to run your business. You’ve been bit by alligators.

3. The classic survival story involves fraud. Almost half – thats 50% – of our clients have encountered some kind of fraudulent situation. When the CFO/controller has been systematically stealing, the bank’s knee-jerk reaction can leave you scrambling to find another bank. That’s not so easy in this economic climate. You’ve been bit by alligators, and your company may be devoured.

The key here is to put safe guards in place with the assistance of your auditors. Don’t let the CFO set the testing limits above the limit he’s stealing. Let your auditors run the process. Also, as the CEO or key manager, you should periodically sign every check for a month that would normally be a “one signature” check handled by the CFO/Controller. This control is one great way to start draining the swamp.

How to Avoid Being Bitten by Alligators?

Be proactive instead of reactive. Drain the swamp before the alligators take up residence and start chomping.

As your company grows and you start delegating work, make sure that you keep yourself embedded in enough of the processes to have proper control. Don’t delegate and forget.

If you have auditing processes, don’t stick to limitations (e.g. we’ll look at all transactions over $5000). Mix things up and be unpredictable, so that no one can take advantage of your complacency or your routines.

Ask a lot of questions of your key people. Learn about your cash flow, your payables, and your company’s projections. Don’t believe what you’re told. Follow up on the details and have an auditor check out those projections. That’s prudent business practice.

I’m not suggesting that you don’t trust your CFO or that you don’t believe anyone. I’m just saying you need to question what’s happening and check up on things for yourself.

This may not be draining the swamp, but it is keeping the water level down. This is being proactive – not reactive – and it will always cost you less time and money.

Until next time, don’t get bit by the alligators.

The CEO’s 10 C’s of Borrowing

Bankers and business owners can have trouble communicating because their mind-sets are different.

As someone who began his career as a banker and who has spent the last 30 years doing interim-CEO turnaround management, I understand the banker’s mindset while having profound insight into what makes businesses run successfully from the top. Most of my day is spent playing “Let’s Make a Deal:” negotiating with lenders, creditors and bankers in order to get CEOs and their businesses new terms that allow continued operations.

In my experience, it’s particularly difficult for these two groups – business leaders and bankers – to understand each other because they’re coming from such different places and have seemingly different priorities.

Part of the process is helping both sides see that they’re in a partnership. Both bankers and business owners want to see the business continue to run because that’s the most likely way for the bank to recoup its loans and eventually see profits, and its the only way that the business will turn from debt to profit.

Thus, as a business owner, you should strive to understand how your banker thinks – and why he thinks that way. This can have a positive effect on your relationship and make it easier to get money when you need it. I present to you, then, “The CEO’s 10 C’s of Borrowing,” which will help you become a better borrower, enhance your relationship with your banker and make money more available when your business needs it most.

1. Character is of the utmost importance to bankers.

Bankers need to know you’ll do the right thing when your company is in distress. If they can’t trust you, they can’t put money in your hands. That doesn’t mean fake good character – it means have and demonstrate good character.

2. Carelessness comes down to poor record keeping.

Carelessness can also hurt your bank by causing it to write-off loans needlessly or even lose its federal loan insurance such as SBA Guarantees. Run your shop well, which includes good book-keeping practices, regular audits, competent comptrollers, and mixing up your monitoring practices. Not being careless also means verifying for yourself the details of your business’s financial situation.

3. Complacency is not an asset.

Banks are interested in how you react to tough situations. Don’t just tell them what you’re legally required to when they ask; keep them updated to avoid surprises. Bankers hate surprises. This is all a part of the larger principle of being proactive rather than reactive. Proactive business owners keep their banks apprised of the situation, which makes their banks more likely not to react to unfortunate circumstances by demanding payment on loans.

4. Contingency Plans are key for orderly succession if something happens to you.

Bankers value stability, and even though many business owners think they’re invincible, history has proven otherwise. If your bank knows what will happen in the event that something bad happens to you – like disability or death (God forbid) – that’s comforting to them. If they know what will happen to your business in the event of various catastrophes, they’ll continue to work with subsequent leadership. It’s also wise to introduce your banker to the future generation of leaders at your company. Have contingency plans. Nothing works out like your spreadsheets suggest.

5. Capital is your net worth (assets minus liabilities).

Bankers want an extra cushion of equity so they can be more flexible with your company in case it has a bad year. A CEO and a banker need to balance one another’s needs in order to maintain sufficient capital. I sometimes find that telling entrepreneurs, owners and CEOs to keep extra capital around is like telling a dog to save part of his dinner for later, but if you can show your banker that you’re capital-wise, he’ll be more likely not to call your loan after a bad year.

6. Collateral is a bank’s leverage and makes bankers feel more comfortable.

Collateral does not repay a loan, as many entrepreneurs think when they pledge their assets, but again, it does ease the banker’s mind.

7. Capacity is your ability to repay.

Bankers check to see if you have champagne tastes but a beer wallet. If you seem like you can repay what you’re asking for – which is to say, a reasonable sum and not your dream loan – you’re more likely to see the money. Shoot for the stars in life, but a bank loan is a different matter.

8. Competition works to your advantage.

Banks are concerned about their competitors’ interest rates, collateral packages and guarantees. You can use this to your advantage by doing your homework when seeking a loan and making that clear to your banker (though no one likes to feel threatened, so be courteous about this). Knowing about your bank’s competition can also let you prepare for a quick capital search should your banker pull out.

9. Controls are your built-in monitors.

Bankers want to know about your company’s controls. Do you have checks and balances for payroll clerks, controllers, CFOs, and inventory personnel? Do you watch the back door? Outline the steps you take in your plans and conversations with your banker; ask for his recommendations. If you find an issue, correct it and then update your banker that you’ve fixed the problem.

10. Communication is essential.

Almost every one of these tips hinges on communication. Don’t keep things from your banker. If he knows what’s happening he can work with you instead of against you. Work with your banker for the best relationship.

With “The CEO’s 10 C’s of Borrowing” in mind you’ll be better equipped to understand where your banker is coming from and not get frustrated when things don’t seem to go your way. Talk with your banker and try to understand him. It will only be to the benefit of your business.

Which of these have you found useful or true in your experience? Let us know in the comments.

I’m Lee N. Katz and It’s Nice to Meet You

Allow Me to Introduce Myself

My name is Lee N. Katz, and I’ve specialized in turning companies around for more than 25 years. In 1986, I joined Grisanti, Galef & Goldress (GGG), one of the oldest turnaround consulting firms in the United States. In 1997, I became the managing partner.

Throughout my career in crisis management, I’ve served as an interim executive officer and reorganization director for both large and small companies, public and private, with annual revenues from $5 million up to $3 billion. In addition to offering expert-witness testimony regarding business valuations, turnarounds, and plan feasibilities, and I’ve served on court-appointed federal and state receiverships.

I love using my skills to help owners, CEOs and boards of directors prevent crises from happening, but no one ever seems to know a crisis is happening before the roof gets blown off the barn. And that’s when I step in.

In the 70s I worked for First National Bank of Atlanta, eventually directing their asset-based lending in the Atlanta area. I’ve also spent quite a bit of time developing and managing commercial real estate for end users like Wal-Mart, John Wieland Homes, and other private investor groups.  I’ve renegotiated more than $1 billion in real estate leases and handled numerous environmental issues for real estate and corporate manufacturing clients. Sometimes I do this in cooperation with state and national Environmental Protection Agency authorities.

I often serve as a financial advisor to individuals and trusts.


People often ask me what I specialize in, so I thought I’d toss the short list your way:

  • Financial Restructuring
  • Bankruptcy and Bankruptcy Restructuring
  • Real Estate Receiverships, both Federal and State
  • Operating Company Receiverships, both Federal and State
  • Restructuring Bank Debt with the FDIC and Successor Banks
  • Asset Liquidations
  • Alternative Restructures to Bankruptcy
  • FDIC Negotiations
  • Corporate Due Diligence
  • Bond Restructuring
  • Financial Advising to Bond Funds
  • Corporate Downsizing

Some Public Recognition

For those of you who are kind enough to be interested, my firm, GGG, has been recognized by the Turnaround Management Association’s (TMA) Atlanta Chapter:

• 2008 Small Company Turnaround of the Year Benton-Ga, Inc. Learn More
• 2004 Non-Profit Company Turnaround of the Year – Life University Inc. Learn More
• 2003 Large Company Turnaround of the Year – P.S. Energy Corp.
• 2002 Large Company Turnaround of the Year – Wyncom Inc. Learn More

So, that’s a bit about me.

Now you know who’s writing this blog. If you have any questions about these things or if there’s anything general that I can answer for you, please don’t hesitate to ask in the comments.