In the first part of this series, we saw how poor internal controls and misplaced trust caused this company to nearly fold. This is the kind of fraud disaster that shutters the victim company most of the time. Like most internal frauds it was also completely preventable, though that is a topic for another article. This article details the action steps necessary to recovery.
Managing for 90 Days (aka: The Make or Break Period)
There are an astounding number of tasks that have to be managed in the first fragile 90 days in the hopes that the company can survive. In this case, we hired a new office manager who passed reference, background and skills checks. We established
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Payroll: We developed a spreadsheet to calculate gross checks based on the net checks provided by the bank, hours records provided on
tax reports, and from any and every paystub that the workers could find. -
Invoices: Final work tickets were downloaded from the shop floor software to an
Excel file and sorted by customer, then date. The work tickets were matched to the invoices and statements provided by the customers (if available) and reentered intoQuickBooks . New invoices were prepared for all unmatched work tickets. All invoices were deemed unpaid unless proof of payment was provided. Some customers were helpful while others took this opportunity to delay payment by delaying information sharing. - Purchase Orders: Vendors were more than happy to provide statements for outstanding accounts payable. They were remarkably resistant to providing a deeper history to help restore the records for the full year. The stated reason was that they didn't have time or staff to devote to the effort. In some cases, we sent temporary workers to copy files - or embarrassed them into providing the data by offering to send temporary workers.
- Tax records: It was a surprising hassle to get the tax records, due primarily to the office manager's control of the passwords.
Throughout those 90 days, we made real progress while dealing with frustration, fatigue and a desperate lack of cash. Perhaps the most important service we performed was maintaining a positive mental attitude for the owner, employees and customers. Everyone needed hope that there would be light at the end of the tunnel, that the company would make payroll and still have cash left over to buy parts. The owner needed help to get through the expected emotional phases of shock, denial, anger and acceptance.
By the end of this period, transactions that were reflected in the bank for the calendar year (9 months) had been restored, with the exception that most of the cash withdrawals could not be accounted for and were presumed stolen. The company had lost some customers resulting in lower revenue and cash, and some customer accounts were referred to collections. Most of the vendors required cash on delivery. We were now ready to prepare a fraud examination report.
Managing the Long Haul
The first phase of the fraud report provided proof of unauthorized distributions that could be proven, such as fraudulent payroll for the office manager, daughter, son and boyfriend, as well as the checks written for her personal expenses. Based on this factual data, the police were able to obtain subpoenas for her bank records. Those records showed additional cash deposits in excess of her and her boyfriend's payroll. Since this was consistent with the cash withdrawals from the business, it was compelling evidence.
We worked with the company's
Meanwhile, a second wave of disaster struck when a Department of Revenue representative actually reached the office manager on her cell phone. She realized that she had an opportunity to do more harm, and she told the representative that the company had fired her when she realized that it was defrauding the State on their business taxes. She recommended that an audit be initiated immediately. Since that got a strong response from the Department of Revenue, she called all other taxing authorities and spun various tales: she told Labor and Industries that all the mechanics were undocumented workers and recommended an I.C.E. raid; she told the Department of Employment Security that the reported worker hours never included overtime and recommended an audit. The net result was the filing of three major audits/investigations being initiated simultaneously. I spent a lot of my time responding to these audits, which drove up the cost of the engagement substantially.
Coming to a Conclusion
It took almost a year to get this company back on the road to solid footing. The first six months focused on the financial recovery and the second dealt primarily with responding to the various audits. We continued to supervise the financial process, and eventually hired an accounts receivable clerk as the volume returned to normal and the office manager proved capable of playing a deeper
What happened to the original office manager? It took months to get the case to the point of an arrest, and in the meantime she went to work for another company as an
The two cases together got the system moving faster, and before she could move again she was arrested and charged with over 500 counts of embezzlement, identify theft and fraud. She is currently serving out a 15 year sentence.
The repair shop struggled to stay open and missed payroll multiple times in the first year, mostly due to very short term cash flow shortages. The shortages were primarily attributable to the extensive makeup payments that had to be made to the various taxing authorities on a weekly and monthly basis. Eventually, the company got past that point and was able to retain some cash in the business to stabilize