Accountants are supposed to be the guardians of financial records. But what happens when an accountant decides to pull a fast one? It’s not common, but accountants occasionally fall prey to the Dark Side and rip off their clients, employers or others.
In February, for example, a Camden County woman was charged with embezzling $3 million dollars from a New Jersey-based company where she was the senior accountant, accounting manager and senior financial shared services manager, according to an announcement by U.S. Attorney Philip R. Sellinger.
The 49-year-old Atco resident worked in the accounting department of the company from 2011 to 2018. She allegedly embezzled from the business — which was not named by Sellinger — by charging “significant amounts” of personal expenses for herself and her family on the company’s corporate credit cards issued in the name of another individual, and on a department-issued card.
The alleged fraudster concealed her personal use of the corporate credit cards from her employer and directed payment of personal expenses from corporate funds without the employer’s knowledge. In addition to the alleged theft, the accountant is charged with attempting to evade $514,801 of federal income taxes from 2015 through 2018.
How can a company guard against something like this? James O’Brien can talk about combatting fraud. A partner at Grassi and the Forensic, Litigation Support & Valuation Services Leader at the firm, O’Brien uses his financial expertise to protect business owners from inappropriate and/or unauthorized financial activity, and routinely assists clients with improving their financial operations by strengthening internal control processes.
Start out small
He said that business owners can easily protect their financial operations with “something as simple as regularly analyzing their company’s bank statement transactional detail.”
That’s because a financial institution “is an independent third party that records where money is coming from and how it flows out of the company,” he noted. “So examining checks and reconciling a bank statement each month — instead of simply relying on summary level information — can alert [businesses], especially small- and medium-sized ones, to the possibility of inappropriate and/or unauthorized transactions.”
The accounting function “records transactional information to present in financial statements like the P&L, or income statement, and balance sheet,” O’Brien said. But the financial statements “don’t let you see the granular details of a transaction. I’ve seen cases where a person committing inappropriate activity prepared a very nice report, but no one looked behind the curtain to verify the details, and there were serious consequences for the company.”
In one case, he said, “the bookkeeper at a healthcare company recorded transactions to legitimate vendors in the payables system; however, the checks were written directly to the bookkeeper. When the investigation was finished, it was determined that the bookkeeper misappropriated $4.5 million. The unauthorized activity went undiscovered for over six years.”
The then-outside accountant who was responsible for reconciling the company’s bank statement, did not look at copies of the canceled checks “and only relied upon the in-formation that was recorded in the QuickBooks transactional activity,” he added. “The bookkeeper was coding the checks to legitimate vendors, so the fraud was not uncovered until we were brought in — and the bookkeeper eventually pleaded guilty to fraud.”
In addition to bank reconciliations, businesses can take other steps to limit opportunities of insider fraud, he said. “Set appropriate internal controls in place, and understand what employees know about the potential weaknesses. For example, the person who approves purchases may set up a ‘dummy’ company and then approve the company’s in-voices for phantom goods or services that are never received.”
Confidence in the accuracy, timeliness and relevance of performance data “is critical to effectively optimizing corporate activities and communicating reliably to the capital markets,” said former FASB Chairman Robert Herz, in a white paper he co-authored with Montvale-based Institute of Management Accountants President and CEO Jeff Thom-son, and Brad Monterio, who currently serves as an executive vice president at the Institute of Internal Auditors. “In the financial reporting ecosystem, confidence is bolstered in part by the implementation and application of effective, integrated internal controls — controls established using the Framework developed by the Committee of Sponsoring Organizations of the Treadway Commission.”
Internal controls are especially important now, given the current “great resignation” trend. “There are often fewer people doing more jobs, so it’s more difficult to uncover this kind of inappropriate and/or unauthorized activity,” explained O’Brien. “Substantiating the appropriateness of the transactional activity is paramount to limiting exposure to inappropriate and/or unauthorized activity. Finally, a proper insurance policy can cover the losses associated with inappropriate and/or unauthorized activity and usually pro-vides for some level of coverage for the investigative expenses associated with documenting the loss.”