John Smith (not his real name)
East Coast
When: 1990
Employee’s title: Partner Tenure: 2 years
Method: Smith and his partner had known each other for about eight months when they decided to make career changes and purchase an existing remodeling company. They were 50/50 stockholders in the corporation. Smith operated the deck building division, and his partner operated the remodeling side.
The corporation had an official name, but was “doing business as” (dba) XYZ Construction. The partner formed a separate company by incorporating the dba of XYZ Construction. He began signing contracts under XYZ Construction and depositing the down payments into an account for that company. Smith had no idea that the account existed. The partner had told Smith that the remodeling side of the business was really struggling, but he was actually diverting the profits into this account. He also purchased materials for those jobs on the primary company’s charge accounts.
Smith says he seemed to be readying himself to break from the partnership, but to still have a company with an established name. “For him it was a seamless break. From my side, he was stealing,” Smith says. “Stealing money, the company name, and the goodwill that we had built.”
Discovery: The company’s post office box was closer to the partner’s house, so Smith rarely checked the mail. When he finally did, he discovered statements from a bank where the company did not have an account.
Follow-up: The bank where the partner opened the account would not share any information about the tax identification number on the account. “I had to get outside assistance. I was not going to confront him unless I had all the facts,” Smith says.
He hired an attorney who contacted the state corporation commission and discovered that the partner was the principal for the company. Armed with this information, Smith confronted the partner, who admitted that he wanted to start his own company using the dba of the original company. Smith’s goal at that point was to retain the company name and the license. He reached his goals and settled the case. “It cost a lot of money in legal fees. I had to initiate everything,” Smith says. He says he felt the effects for two years. He diverted his salary to pay for the attorney fees, but eventually paid himself back.
Policy changes: The most obvious change Smith made was to never partner with anyone. “When owners are involved in swindling, it is tough to set up internal controls,” he says.
He now has a dual check log procedure for customer payments. The office manager logs in checks in one place; the bookkeeper then logs them into the accounting system. “This is for several reasons. First, we can make sure that when the field generates an invoice and collects, we know money is due. Second, I can see the office manager has endorsed it. Then I can see that the bookkeeper has entered it in the system. Those three things need to match,” Smith says.
Smith, his wife, and the bookkeeper are authorized to sign checks. Bank statements are sent to Smith’s house, and he opens and reviews them at home before bringing them to the office.
He also checks statements to see if anyone has used the bank’s counter checks for cash. In addition, Smith switched to a smaller bank where the officers know him personally. “They will call about checks that don’t look right,” Smith says.
He has also informed his vendors that charges to the company’s accounts are not valid unless attributed to a purchase order. “This prevents an employee from ordering a load of lumber that gets delivered to their house,” Smith says.
Ray Wiese
The Wiese Co.
Natick, Mass.
When: 2000
Employee’s title: Bookkeeper
Tenure: 4 months
Method: The bookkeeper was purchasing items through the company’s vendors, such as The Home Depot, for her home. “Everyone in America can use products from that store,” Wiese says.
Discovery: Wiese fired the bookkeeper because she was taking sick days without good excuses. “She was performing really poorly — almost as if she wanted to be fired,” he says. Wiese had noticed a significant dip in gross profit on jobs. When Wiese and his wife reclaimed the books, they noticed that the products on the vendor invoices did not correlate with their projects. She had taken $8,000 worth of materials.
Follow-up: Wiese did not pursue legal action against the employee because it would have been too expensive and would have shifted his focus from the company. “It was a cost/time issue,” he says.
Policy changes: Wiese says remodelers should change their attitude about small monies.
“It’s not always the big hit that will get you. It’s those incremental amounts,” he says.
Wiese’s wife, Terry, has since joined the company. They hired a new bookkeeper, and also put some checks and balances in place to “keep an honest person honest.” Their new bookkeeper does not have control of the checks. She prepares checks for Wiese or his wife to sign. Wiese keeps the blank checks in a locked drawer. The production manager has a checkbook, but at the end of every week is required to direct each check to a specific job. Wiese’s wife reconciles all the bank statements.
Joe Christ
Crist Construction
Cheektowaga, N.Y.
When: 1989
Employee’s title: Office manager
Tenure: 2 years
Method: Christ’s office manager prepared checks for him to sign. He assumed that she mailed them to the appropriate vendors and the government. What she actually did was throw away the payroll tax checks, write checks for the same dollar amount to herself, and forge Christ’s signature. When Christ reconciled the checks, he did not notice the name change because the amount was correct. The office manager also intercepted the tax notices that arrived by mail.
Discovery: Christ was going through a divorce and was distracted. One weekend when he was reviewing the checking journals, he noticed the nonconsecutive check numbers. When he received copies of the checks from the bank, he saw they were made out to his office manager. She was arrested and received a sentence of two years. During the trial Christ found out that the employee had served a year in jail for stealing from a previous small business where she was employed. Christ also sued the bank for accepting 60 forged checks.
Follow-up: Christ said he was able to recover a good portion of the money from the bank, but it took a long time to recover from the IRS. The government agency added interest and penalties to the payroll taxes, which doubled what he owed.
Policy changes: Bank statements are now mailed to Christ’s home, and he reconciles them regularly. He switched to a payroll service that automatically withdraws and pays payroll taxes. “I will never have trouble with that again,” he says.