Accountants Offer Valuable Lessons for Avoiding Fraud

Accountants Offer Valuable Lessons for Avoiding Fraud

Martin C Daks. NJBIZ. New Brunswick: Jul 14, 2008. Vol. 21, Iss. 29; pg. 5, 2 pgs

Abstract (Summary)
"In theory, transactions should be verified by a second person with a three-way match involving a purchase order [issued by the company authorizing the transaction], an invoice and a cancelled check," Sonnenberg says. Starting in July 2006, Rogers allegedly wrote out more than 60 company checks to himself for amounts ranging from $10,046.73 to $38,119.38, according to documents filed in federal district court in Camden.

A SMALL-BUSINESS owner's worst nightmare came true when a bookkeeper embezzled more than $ 1 million from his long- time Pennsauken employer, according to a lawsuit playing out in a Camden courtroom. Accountants say the case, Dependable Distribution Services Inc. v. Michael Rogers, illustrates the challenges small companies can face when it comes to implementing an effective system of checks and balances.

Having one employee write checks and record them - as Rogers allegedly did - represents a serious lapse in internal control and invites fraud, some accountants say. Small companies that can't afford to hire many administrative employees may be particularly at risk, since they often have one person take on multiple functions. But safeguarding a company's checkbook doesn't have to cost a lot, accountants say.

"Unfortunately, it is not uncommon for an internal accountant or bookkeeper to embezzle funds if they're not closely watched," says Harvey Sonnenberg, a partner with the internal control and Sarbanes-Oxley group at the Edison office of Weiser LLP, a CPA firm. Sonnenberg and the others quoted in this article are not involved with Dependable Distribution Services Inc. or Rogers' case.

"In theory, transactions should be verified by a second person with a three-way match involving a purchase order [issued by the company authorizing the transaction], an invoice and a cancelled check," Sonnenberg says. "This way, if the payee or amount on the check does not match the invoice, you know right away that there's a problem."

Another solution is to have an outside accountant review the company's checking activity on a periodic basis, says Ricardo Solano Jr., a director at Gibbons P.C., a Newark-based law firm.

"But the cost can be a problem, especially for a small firm," says Solano.

In the absence of an outside auditor, an employee other than the bookkeeper should routinely review a batch of checks, keeping an eye out for any unusual transactions, says Solano.

But apparently no such oversight existed when Rogers joined the firm in 1992 as a bookkeeper-accountant who was responsible for paying bills and payroll. Court records show Rogers was also tasked with updating the general ledger at Dependable, which has 77 employees and rings up about $8.9 million a year in sales, according to Hoovers, an industry and market information provider. Dependable's controller, Denis Dribin, who signed the complaint against Rogers, declined to talk about the case.

Starting in July 2006, Rogers allegedly wrote out more than 60 company checks to himself for amounts ranging from $10,046.73 to $38,119.38, according to documents filed in federal district court in Camden. He was able to cash $1.3 million of unauthorized checks before the scheme was discovered, according to the lawsuit, which was filed June 26. The lawsuit seeks a jury trial and a return of the funds.

To throw off suspicion, Rogers signed the checks with an executive's signature stamp, and falsely recorded them on the company's books as payments to third-party providers and to the company's president.

Solano, a former Assistant United States Attorney with the District of New Jersey, says the Dependable case reminds him of an embezzlement he helped investigate.

In that case, a Hoboken Housing Authority accounting manager snatched $111,083 by issuing HHA checks to himself without authorization, according to Solano.

"Basically, he had the run of the operation and no one was checking up on him," explains Solano. "As I recall, the scheme wasn't discovered until a routine outside audit was done. Then it became clear that the manager was writing checks to himself and depositing them into his personal bank accounts."

Living above one's means can be a tip-off that something's not right, says Kenneth Nielsen Goldmann, a partner with the Roseland-based CPA firm J.H. Cohn.

He recalled a case in the news where a photograph pointed the way to fraud at a New Jersey college.

"A few years back, a college employee was in the office of the institution's chief financial officer, admiring a photograph of the executive at her Florida vacation home," says Goldmann. "That was not unusual. But then the employee noticed a brand-new Mercedes was parked in the driveway in the photo and started to wonder how the executive of an educational institution could pull that off. Things took off from there, and it turned out she had been embezzling funds from the college."

But rather than hoping for a lucky break like that, Goldmann says a few simple steps can help to deter or discover an embezzler.

"One step is to require the employee to take a vacation for at least a week," he says. "That gives someone else a chance to do the employee's job and possibly uncover unauthorized transactions or improper recordkeeping by performing bank reconciliations and other analyses."

Another option, particularly with a small company, is to toss signature stamps and instead require the chief executive's personal signature on every check, according to E. Martin Davidoff, a Dayton CPA and tax attorney.

"I trust my bookkeeper, but she does not sign any of our checks," says Davidoff, who has a 12-employee accounting practice. "Not only that, but all of the bank statements are sent directly to me, unopened."

Davidoff recalls a case where he was called in to investigate some shady dealings by a lawyer who was suspected of embezzling money from a wealthy elderly woman.

"The lawyer had served two generations of the woman's family and had 'power of attorney,' or the authority to pay bills for the family," Davidoff says. "But the woman and her CPA began to get suspicious about some of the transactions. I was called in, looked at the bank statements and asked the attorney to show me the bills associated with the checks he was drawing."


The attorney, who wrote an estimated $600,000 of checks for non-existent transactions, was unable to produce bills, and at age 64 was ultimately jailed for fraud, Davidoff says.
"There's no telling who's out for your money," warns Davidoff. "Reviewing bank statements and other documentation, and segregating duties can help to safeguard your cash