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?


My Greatest Magic Trick: Creating a Million Dollars in Cash Flow Overnight

So I’ve decided to share my coolest business magic trick with you. I can create a million dollars in cash flow out of thin air – and valuable as a million dollars is, there’s nothing like magically creating extra time.

Now, now, I know that a magician isn’t supposed to go revealing the way his tricks are done. It’s bad for business, and where’s the money in that!?

But what’s good for you is good for business, so I’ve decided to share.

Now You Owe 4 Million . . . 

First, let’s suppose that you have 30 day terms with your vendors and a million dollars in payables every month. Imagine that we’re just looking at the first four months of the year, January through April.

Over the course of those four months, then, the total payments are 4 million dollars.

Check out this picture:

So how do I create a million dollars?

And Now You Owe 3

All I have to do is extend normal trade terms from 30 to 60 days and suddenly you owe nothing in January!

That means that the million dollars walking out the door in January is still in your pocket. A million dollars has just been added to the positive side of your cash flow.

That’s right: in the four month period of January through April you’re now paying only 3 million dollars! You still owe that million, but by changing the timing of your payments, it’s been pushed back every month going forward.

Don’t Try This at Home

So why have I told you one of my greatest magic tricks and one of the best strategies of my turnaround success? Because the secret’s in the sauce!

My real talent is playing, “Let’s Make a Deal.” They don’t call me Monty Hall for nothing. The key – and hard part – to this magic trick is doing the right financial assessment and then successfully renegotiating with vendors to obtain extended terms and create that improved cash flow.

When businesses try to get vendors to give them an extra 30 days to pay a million dollars, vendors get agitated and concerned. My job is knowing what vendors need to hear, what makes them comfortable, providing them with the proper assurances and then making sure that those 30 days are used in the best possible way to ensure things get back on track by the second month.

Remember, you have to keep to your negotiated deals. You don’t want this to blow up on you, and it takes a professional to see this process through because generally this trick is one piece of a larger successful turnaround and restructuring strategy.


In business there’s hardly anything so valuable as creating time, and if you can make money come out of that time to boot, you’re in great shape. My skills lie in putting people into great shape.

My golden formula is time + energy = value. I create the time and bring the energy, and with those two pieces in place I can provide value.

Have you ever tried to renegotiate your terms? If so, what happened? Have you ever tried this trick yourself?

“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.