Many corporations judge the health of their finances based solely on the bottom-line. However, as one article shows, there is more to a company’s financial health than the final net profit. According to Joseph T. Wells, in his article “control cash-register thievery: show your clients the importance of looking above the bottom-line,” fraud does not always show up on balance sheets.
In this article, Wells discusses the problems a particular client had when it was found that there were suspicious return receipts on certain products. This was definite trouble for the company, which was named Discount Department Stores (most likely and assumed name in order to protect the real company that underwent this problem).
The first tip came when the company’s internal auditor spotted sales for funds of exacting amounts — 3 and are dollars — $400 and so on. Knowing that refunds do not typically come in exact hybrid-dollar increments, the auditor worked with Wells, who headed up a fraud squad at the time. As Wells question the auditor, he learned that Discount’s methods of financial accounting involved checking net sales and confirming that amount in the bank, rather than performing a horizontal analysis of income statements to determine if refunds were increasing as compared to sales.
After further analysis, the men were able to trace the potential criminal — a former store manager who had left the company. In trying to prove that the former manager was the culprit however, Wells needed access to his personal financial records. He noted there were three ways to obtain them: call lawyer, call the police, or call both. Discount’s CEO, wanting to save the legal costs, decided to call the police. Approaching the police department and Wells was able to obtain a subpoena to open the former manager’s bank account statements. When the statements were obtained, Wells and Discount’s auditor were able to match the register receipts of exacting amounts with the sun unexplained cash deposits in the manager’s checking account. Shockingly, of the $800,000 that had been stolen over a three-year period, more than $600,000 had been deposited in this bank account. Unfortunately, because there was no eyewitness to the theft, and because the prosecutor was not interested in prosecuting a net-worst case, which this was, charges were not raised against the former manager. Although Discount’s CEO filed a civil lawsuit against the former manager for fraud and theft and notified the IRS of possible tax fraud, Discount was unable to recover the money from the civil lawsuit and the IRS still has not caught up with the former manager. Although Discount’s Fidelity insurer did cover the company against losses of this type, the policy had a $500,000 deductible, meaning that amount had to be charged to discount’s earnings.
On the surface, it seems as though a loss of $100,000 would raise erect flag for almost any corporate auditor. However, for whatever reasons, and the internal auditor had not designed controls or systems that would detect/deter fraud. Such systems are straightforward — and involve the before-mentioned horizontal analysis of the balance sheet. The auditor however, had focused on the net, rather than the gross sales. There were other red flags as well in this case — such as the trend involving increasing refunds.
The CEO had failed in this case as well. Although the CEO and auditor had been kept in the dark about this issue, most of the store’s employees knew was going on. Unfortunately, the company had no confidential hotline or other means for transmission of confidential information that would guarantee safety from reprisal. Furthermore, Discount did not have a specific, written ethics policy, it boarded the Company provide managers and employees anti-fraud training. In addition, although the CEO did receive detailed financial statements for each store (which indicated increasing refunds and no one store), he acknowledged that his only concerned had been the bottom-line.
Finally, Wells blamed himself for not providing a more clear-cut case to the District Attorney’s office. When he had made the initial presentation, the prosecutor had been bored with the numbers in did not want to deal with the case. Because Wells’ experience had been more with federal prosecutors and defense attorneys who were familiar with net-worst calculations, he had assumed that this prosecutor would also be familiar with this particular form of evidence. Wells notes that he could have made his presentation much simpler and more visually interesting — such as taking pictures of the new car, home and bait, shop in the former store manager had purchased with the money he had stolen. In addition, Wells said he would have been better off preparing visual aids such as charts and graphics that outline the scheme, rather than showing complex spreadsheets and bank statements. Finally, Wells said he should have interviewed the manager’s former employees before presenting the case. He acknowledged however, that he believed he had enough information to go to a grand jury.
In this article, Joseph Wells outlines what can happen when assumptions are made and when things are not better studied below the surface. If the auditor and CEO had analyzed the gross sales as opposed to the net sales, the store manager likely would not have gotten away with embezzling the funds in the manner in which he did. In addition, if Wells had not made certain assumptions himself, this embezzlement situation could have been brought to trial, and Discount could at least have counted on receiving its lost revenue back again.