Doug Houser:
From Rea & Associates Studio, this is unsuitable, a management financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser. On this weekly podcast thought leaders and business professionals break down complicated and mundane topics and give you the tips and insight you actually need to grow as a leader while helping your organization to grow and thrive. If you haven't already, hit the subscribe button so you don't miss future episodes. And if you want access to even more information, show notes, and exclusive content, visit our website at www.reacpa.com/podcast and sign up for updates.
It's no secret that bad actors are getting sneakier, but with the right tips, you can protect your organization from fraud. Today Karen Davis, now the owner and founder of Green Oak Advisors LLC, is here to talk about fraud, best practices in terms of accounting, and how it can impact all of your accounting and finance processes. Welcome to unsuitable, Karen.
Karen Davis:
Thank you so much for having me.
Doug:
So great to have you on. We've known each other a long time and we won't go into that. We don't want to offend the innocent between us.
Karen:
Exactly.
Doug:
But yeah, absolutely. We've shared a lot of war stories over the years, and I have to say we've had some entertaining mutual clients and folks that we've been able to really help out of some difficult situations. But there's always a few too, right, that don't necessarily always take the advice and speak the assistance that they should. So, we'll talk a little bit about that here today. So give us, if you could, just a quick overview of some of the things you see. You get engaged, right, to go in and help folks, businesses with their accounting processes and procedures. So where do you start when you get engaged with a company to assess things?
Karen:
That's actually a really good question. I'm actually pretty passionate about this because I'm starting to see more and more fraud in this last year because of the pandemic and people are feeling very uncertain. And so I'm starting to see people starting to charge personal things on credit cards. And so when I get called into a company, the first thing I try to do is look at their financials and then I interview people, and you'd be surprised at how much people will tell you if one person is doing something that shouldn't. That's what all the studies have said is that the way to find fraud really is through employee tips. And so if I go in and start asking questions and some things don't make sense on the balance sheet, or I'll start digging in. One example to jump right in is I went in and they told me that their CFO just works on Sundays. And I said, "Well, that's kind of interesting."
Doug:
Yeah.
Karen:
So I started part-time and I thought that's unusual. And I said, so I started just digging into their accounts and I saw some unusual things, which is that the controller had his name in the vendor ID spelled three different ways, and he was cutting all kinds of checks to himself. So I went into the owner and said, "How much do you think you're paying him a year?" And he said, "Well, I'm probably paying him maybe the equivalent of about $6,000 a year." And I said, "Well, in five minutes, I have found about $60,000 in checks that you didn't know about."
Doug:
Ouch.
Karen:
And that was just in one year. So you really see, you just start digging in and asking questions.
Doug:
Well, You certainly have what I would call a gift or the ability to quickly sniff out where things look a little amiss. And I think part of that's due to the experience you have and just the ability to notice through your years of experience, notice when something just doesn't quite smell right. And as you said, it's interesting in talking to the folks within an organization, how much you find out and how much they're willing to confide in you. So, what are some of the most common things that you see in terms of fraud in owner-managed businesses? You talked a little bit about the credit card thing.
Karen:
Credit cards are the easiest. And I would say that of late, what I'm seeing is Amazon charges to show up on a credit card, but it doesn't say what it is. And so what happens is that they start with just little things. So they'll put an Amazon order in, and they'll just add maybe a five or a $10 item for themselves. And maybe it even looks the same, like some Lysol wipes or some soft soap, that type of thing, and they get away with it. And I know this because I've done a big forensic of late and started seeing the next charge was a little bit more aggressive, or they got gift cards. And again, they're just going on the credit card saying Amazon. And so the owner that's just looking at it, or they're getting really busy and they just don't catch it.
And so it's pretty amazing what people start to do on credit cards. I had one instance this past year where somebody said, "We accidentally used the wrong credit card to put our airline tickets on it." And so I'm like, "Okay?" And I'm hearing this story secondhand from the office manager who's saying, "I can't get anybody to pay attention to this. Can you help?" And apparently, she said, "Oh, I'll bring in a check, but I'm never in the office. I'm good for the money." And then the next month comes around and there are some really weird charges and a whole other set of airline tickets.
Doug:
Wow.
Karen:
And she says, "Well, it was in my computer that way. So it just defaulted and I didn't notice. And the office manager is still frustrated no one's paying attention. And they had made this facade that they were living in this wealthy house that they owned. Turns out they were renting and were behind on rent, eventually evicted. And so all of it turned out to be a fraud. But at the end of the day, it was $26,000 later, and there's no way for that accompany to recoup that.
Doug:
Right.
Karen:
So I would say credit cards are the easiest where people just get ... I think they just get too busy to really do the due diligence of looking at receipts against what's on a credit card and they're looking at general amounts that someone's charging and they just pass it off and it just keeps mounting over months.
Doug:
Yeah. So not paying attention to those details, obviously. And one of the other things, and we noticed this quite often, it's just you don't have that segregation of duties, of course. And with many small owner-managed businesses, you just sometimes you can't do everything the way you'd like in terms of segregation of duties. But what are some of the best practice processes and things like that, that folks can adopt to help prevent some of this?
Karen:
So a couple jumps out at me right away. For one, I think that I've seen a lot of fraud in the payroll because I think everyone's just used to letting an individual do payroll. And one thing that I try to encourage my business owners to do is to actually look at the very detailed payroll reports, maybe every three or four times. And, because otherwise, people give themselves raises. They give themselves bonuses and no one's ever looking at it. So that is one thing that I really encourage people to do. And even they all say that payroll is so sacred, they don't want anybody looking at it. Well, if no one looks at it, then a lot can get passed through. So that would be one practice.
Another one would be when the bank statement, just log into the bank statement and look at all the canceled checks. It's usually another tab. Now with technology, no one's sending your bank statements through the mail. Everything is just done through IT. And so people don't typically look at that and they really should. They should take a look at it, print everything off, even though they think it's wasting paper, and they should sign off on all those checks and look at invoices that they don't recognize. So that would be another tip for a small company that doesn't have enough people to have a really clear segregation of duties.
Doug:
Yeah. I'm often amazed at how many clients that we go into where the owner never looks at the bank account or never log into the online banking. And I always tell people and you know this quite well, cash doesn't lie. So if you at least take the time to log in, look through the items and disbursements that are happening there, the owner is likely to at least maybe see something that might raise a question in their mind, and then they can bring it up. So, I wholeheartedly agree with you. We've got one situation right now great business, family-owned business. But there's been unfortunately some disagreements among the family members. And because they were family, the one family member who acted as a CFO they just gave that individual carte blanche to do all of those duties, because they had trust that they were family.
Well, stuff as you might imagine, gets either not documented, just very sloppy. They start to question certain expenditures. There's no idea what they're really for. And then, of course, come to find out there's personal stuff running through there that shouldn't be. Talk a little bit about documenting process and procedures, because obviously, that's one thing as a CPA firm, we like to see. But when you go in and help companies, how often would you say that true accounting processes and all that are well-documented? What percentage would you put on that?
Karen:
Zero.
Doug:
Zero. Doesn't get much worse.
Karen:
I have never seen it and I've been to some big companies to help them. And I think they're just focused on just doing the day-to-day that I've never seen it. I'm trying not to use names of companies as I give examples, so I won't say when this happened. But this has happened a couple of times where I've gone in and I've just asked the question, "So tell me about your process. How do you approve expenses from vendors and let alone employee expenses?" I recently have had two examples of people who have said, "Well, they just email the invoices and we just pay them." And I said, "Well, are you matching those invoices up to anything, to material received?" And so there's none of that. They're just trying to pay to get by the day. And so I try to say, "Okay, now we need to back up. You could have a vendor you don't know. There could be an amount, there could be double-billing that's not even intentional."
Doug:
Right.
Karen:
And so I try to write down procedures that say you need someone. There's no supervision review in a lot of places. Everyone's just doing their particular job and cutting the checks. And if you don't have segregation of duties or supervision, sign-offs on things, a lot of mishaps can happen. A lot of over billings could happen or fraud.
Doug:
Yeah, absolutely.
Karen:
Yep, and they're not documented.
Doug:
Yeah, and when you go in and try to fix or correct a lot of this, what type of things will you set up from, let's just say a recording type of procedures, basic accounting procedures, things like that? What will you typically try to do for people?
Karen:
I really try to, as you said, follow the cash. So I really want to understand who's got access to the accounting records and how does cash get applied and then who's overseeing it? So I will literally write it down. So I first investigate what they're currently doing and then I identify areas where I think that there's an opportunity for fraud. And then I put something in place and I write it down. And I say, "You need to follow this. Even though you think that there are additional steps." They've done a lot of research, Doug, and most of the fraud is by trusted employees. And so it takes ... research says it takes 18 months to catch fraud. And the median amount of fraud is $120,000.
And so I try to tell them those facts to say, "Look, I know that these are your trusted employees, but if you don't follow what I'm writing of how does a new pay rate get put in? Who's overseeing it. Who's looking at the payroll? Who's looking at the bank statements. Who's looking at the checks? Do you ever do a surprise audit of petty cash or a surprise audit of where are the checks locked up? Do you ever go in and make sure there's none from the bottom missing? Do you see anything weird in your bank statements that would make you say this is unusual, or do you see any change in employee behavior?"
Where all of a sudden this happened with one of my companies, they said, "Oh, I'm really busy. I'm sorry, I'll get you the credit card statement later, and then they never did. And the person moved on. They did that for a couple of months because they were hiding all of their theft.
Doug:
Yeah.
Karen:
And so, yeah, that's, I would say that I really try to document and hand it to them and get them to buy into it because of what could happen. And I do tell them horror stories. I've got a lot of them. I do, big dollars.
Doug:
Yeah. It is amazing how much you see out there. But I think, and this is the value of good accounting process and procedures, right? That not only are you sure that the results that you're looking at are proper and correct which help you manage and make decisions with your company, but you're also it's a extra feeling of comfort that you give to not only yourself as the owner or your management team, but also those third-party advisors too. If you can show and prove that you've got good process and procedures in place with your accounting set up, then that goes miles and miles to helping you with your business, whether it's access to credit, capital, again, any third party advisor. Heck it makes our job much easier, right?
Karen:
I totally agree. Yes, indeed.
Doug:
It allows us to focus on some of the more fun stuff, which is maybe helping them grow their business or additional efficiencies and other best practices in terms of operations rather than the day to-day. So, yeah, it's interesting.
Karen:
Agreed.
Doug:
Now you talked a little bit about you're seeing more of this due to COVID as you've been engaged with your clients. Is that becoming more difficult because of the work from home aspect or just not being together as much in the office? Or what in your mind, what's going on there?
Karen:
So probably one of the biggest things that are going on is that there's no normal, there's nothing normal to compare the expenses against. And so, because they've either been shut down, they've laid off. [inaudible 00:17:18] has infused a lot of money into the company for a couple of months. So you have no benchmark. So from month to month, when you're looking at your expenses and you've either closed down or you've cut your business in half one week, and then another, by 25%. you can't say, "Is this what I should be expecting for this line item?" So that is part of the problem of catching fraud. And the employees are in there on a skeleton crew or working from home. No one's seeing what they're doing, so there's no supervision. And so not only do you have nothing to benchmark it against but then you also have no oversight because everyone's working remotely and they're not asking good questions about what's going on.
They're all just ... a lot of people are really focused on the economy and how to grow their top line to survive. And I'm not sure they're entirely focused on internal controls internally. And they have done research that supports this, that says that when you're in a company that is laid off, then you're more likely to commit fraud because you're uncertain about, "When am I going to be laid off? So I'm going to take what I can. They're not paying attention because they're paying attention to how do I just get my company to survive?" So that is what I've seen of late.
Doug:
That's interesting. I know, going back to the great recession, eight, nine, 10 timeframes, we saw more of that as well. It coincides with what you're indicating there. I think one of the other things too that people forget, you can work with your bank too. There are many pieces of technology, whether it's positive pay or multifactor authentication, multi-factor approval processes for ACH, and things like that, that you can really utilize to help you with some of that segregation. And people just, they either don't want to pay for it, don't want to use it. And there you go, then you have problems.
Karen:
Well, and that's very true because they do have very good systems, but that comes with a cost. And so right now companies are saying, "I'm already losing money. Why would I do that? Why would I spend more?" And if they don't take the time themselves to really either do all the internal controls themselves or have a bank help them with positive pay, it's going to cost them more in the long run, because people are stealing. They really are.
Doug:
Yeah, and the unfortunate part is they look at the accounting process and procedures as a cost, rather than an investment. And to your point, you make the investment in that, it more than pays for itself in terms of not only obviously fraud prevention, but just efficiency and information and all those things. So, it's surprising.
Karen:
I agree. And the other thing I think that people aren't focused on is the payroll side of things, of the hours that people are working. I'm not suggesting that people are not doing well working from home. But it's really those that are defrauding the company. I had an instance where someone was going into their time clock and changing it, and they put eight hours for July 4th and no one caught it. The company wasn't open for July 4th, but no one was really looking at what was coming through to see, "Does this make sense?" And so I think in these type of times, people are looking for more money and that type of thing happens and they need to be more diligent about looking at it, especially now.
Doug:
Yeah, absolutely. That's great, great insight, certainly. And those are some wise tips that hopefully people will cause themselves to maybe take a step back. It really is a good time to do that and really evaluate your processes and procedures. And that's where I think you've been just a tremendous help to the clients that I know, that when we've worked mutually on, in terms of getting them straight in that regard. And it's amazing the turnaround that has taken place in some of those instances, with regard to not only their reporting and process and procedures but just the results that come out of that. Because they're not as concerned about all of those details being improper all the time.
Karen:
Yeah, and it's almost, you'd be shocked. There are even some companies I've come into and just because of my long experience doing this, well one of the first questions that I ask them is, "When's the last time you balanced your bank account?"
Doug:
Right.
Karen:
And you would be shocked. One person said last August, and it was almost a year. And I said, "Okay, well, let's start there." And yeah, crazy questions. It's really the basic blocking and tackling that people don't think is as important. But boy, do you find things that way. So yeah, I've learned to ask really basic questions when I start somewhere because at least it helps me and I do what I call follow threads. So if something doesn't seem quite right, no matter how little, I usually follow it because it'll uncover something else much bigger. And I usually just start with a lot of questions, and I usually follow threads and I find things. I actually love it.
Doug:
Yeah. That's a great way to put it is just tugging at those loose threads a little bit. I love that analogy, and certainly, you've been a great help to a number of our clients and it makes the whole relationship better, I think when people feel comfortable if they've got good, accurate information and they can focus on running their business. That's what they should do.
Karen:
Well, that's the goal of providing that.
Doug:
Yep. Well, thanks, Karen. It's been great visiting with you and we'll be sure to have you on again sometime soon and we can get into more fun stuff. So appreciate you being on today.
Karen:
Thank you so much.
Doug:
And if you want more business tips and insight, or to hear previous episodes of unsuitable, visit our podcast page at www.reacpa.com/podcast. And while you're there, sign up for exclusive content and show notes. Thanks for listening to this week's show. Be sure to subscribe to unsuitable on Apple podcast, Google podcast, or wherever you're listening to us right now, including you too. I'm Doug Houser, join us next week for another Unsuitable interview from an industry professional.
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