Some years ago I received a call from a client referral. the gentleman on the other end of the phone - I'll call him Jim -- said he was certain that one or more employees was stealing from him, but he could not prove it. Could I help? Jim had built a very successful retail store in New York City, and after 40 years of hard work decided to retire, leaving the operations of his business to his two sons while he travelled the world.

The older of the two sons, Don, had worked at the store since high school. At the ripe old age of 27, Don was resented by some of the older employees who had spent most of their adult lives working for the business. The younger son, Ryan, was all of 19, and while mature beyond his years, lacked the experience and respect needed to run the business. I could easily see how an employee might resent having these two young men as the new bosses and possibly feel justified in stealing.

Jim suspected the controller and the bookkeeper. Both were highly skilled at their jobs and the two sons were more than happy to give the entire accounting function over to them. The controller and the bookkeeper recorded the cash, safeguarded the cash, deposited the cash and reconciled the cash. No one ever checked their work!

The day arrived to start the investigation and I drove to the client's store. As I pulled into the parking lot, I saw a huge sign over the store: "CASH & CARRY." A fraudster's paradise! I requested all bank statements, deposit slips, cancelled checks, etc. I signed on to QuickBooks and within no time discovered exactly what had occurred. In my examination of four years' worth of deposit slips, not one of them had an entry on the top line for cash and currency. The controller and the bookkeeper never deposited a penny of cash into the bank. The estimated amount stolen by the controller and bookkeeper over a four-year period was $1million.

As the investigation continued, the controller and bookkeeper became more and more visibly nervous. On the third day of the investigation, neither showed up for work.

As with many white-collar crimes, other than losing their jobs, nothing happened to the two fraudsters. Neither repaid a cent of what they had stolen and neither faced criminal prosecution.

Where was the accountant in all of this? Jim had hired a well-known midsized CPA firm. The firm was retained to come in at year-end to prepare financial statements for the bank and to prepare corporate tax returns. The fee for these services was $30,000. According to Jim, the CPA accepted $25,000 since he paid him in cash! Luckily for the CPA, Jim did not pursue a malpractice suit.



We live in a litigious society and as accountants we are all at risk. How do we protect ourselves from this type of situation? First, we cannot ignore the warning signs. Look for signs of the "Fraud Triangle" - the three factors that are present in every fraud situation. They are motive, rationalization and opportunity.

Motive is the need to commit the fraud or need for money. Rationalization is the justification to the fraudster to commit the fraud. Opportunity is the situation that allows the fraud to occur.

In Jim's business, I clearly saw all three factors. Both fraudsters had motive, they both needed money. The controller had married a woman who came from a wealthy family and he had expressed to others that he needed to keep her in the lifestyle to which she was accustomed. The bookkeeper's wife had a drug addiction and had spent quite some time in rehabilitation.

The two employees watched as Jim travelled the world and his young sons came and went as they pleased, spending money frivolously. It was easy to imagine how they could rationalize being entitled to the money, since they were doing all the work.

Opportunity for the fraudsters couldn't have been easier. There was almost no internal control in the business. No one checked their work. The two worked together to steal the money and made sure they never took days off at the same time.

How do we protect our practices against this type of situation? First, it is important to educate our clients. More fraud occurs in small business than in corporate America. Small-business owners must understand the importance of internal controls and the risks associated with ignoring them. It is our duty to discuss these issues with our clients and to educate them.

Second, every accounting firm should evaluate its clients on an annual basis. A client that may have been a perfect fit when you were first retained may no longer be a good client for you. The change in ownership from father to sons in this story should have been a warning sign to the accounting firm. Inexperienced or unqualified management may be a deterrent in keeping a client. Lack of internal controls should also impact your decision whether or not to dismiss a client.

Next, keep your professional liability insurance policy current and utilize the services of your insurance company. A good malpractice insurance company offers a myriad of services, including general risk management advice, education and training, engagement letter reviews and much more.

And finally, get more involved with local accounting networking groups. Many groups offer both educational meetings and MAP (Management of Accounting Practices) meetings. There is so much you can gain from these meetings. Educate yourself. Network with your peers. Establish relationships with other practitioners who have similar practices to yours. By sharing with each other, each of our practices grows stronger.

We can never fully protect ourselves from fraud committed by others -- but we can and should minimize the risk.

Sandra G. Johnson, CPA, CFE, EA, is president of her own firm in Long Island, N.Y., as well as executive vice president of the National Conference of CPA Practitioners, and chair of its Small Firm MAP Committee.

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