Fraud in the Workplace – Real Cases (The Water Company Caper or, A Most Unfortunate Drain on Profits)

Demystifying Valuation, Economic Damages + Forensic Accounting

I’ve been involved with a few memorable cases of fraud during my career as a CPA. One instance occurred several years ago when I took a short hiatus from public accounting to become the director of internal audit for a “Fortune 500” company. The company, which was in the forest products industry, decided to acquire a large home builder in the state of Colorado. Since the Fortune 500 company did not have that much experience as a home builder, it decided to keep the former owner of the acquired company on as President of the home-building operations. Along with the acquisition of the home building company, the Fortune 500 company also acquired an affiliated water company, which had also been owned by the seller of the home-building company. The founder of the home-building business had decided he could make extra profits if he sold water to the buyers of his homes.

The operations of both the acquired companies were housed in the same building, with the offices of each being separated by a built-in floor-to-ceiling partition. A controller, who came along with the two acquired entities, was in charge of the accounting and financial reporting for both companies. The controller was sequestered on the side of the partition housing the offices of the home-building business. On the other side of the partition was a newly hired bookkeeper who was supposed to be closely supervised by the controller, she was not.

Because the home-building business was so active – and, making some nifty profits, the president required the controller to spend most of his time dealing with the home-building business. As a result, the controller allowed the new bookkeeper to handle, not only the daily accounting for the water company, but also to collect cash from customers who came in to the water company’s offices to pay their bills. The bookkeeper also posted transactions to customer ledger cards, prepared the monthly bank reconciliations, and made the daily bank deposits. The controller was too busy with the home-building operations to supervise the bookkeeper. In fact, he did not look at her work until after she left the company.

One day, the bookkeeper, who had been with the water company for six months, announced to the controller that she had to move to Denver due to a family situation. In fact, she would not have the time to train someone new. The controller was very understanding and told her he would handle the bookkeeper’s duties until he could train a replacement. He wished the bookkeeper well.

The controller began to review the accounting that had been done by the former bookkeeper. He started by looking at the bank reconciliation she had been preparing and immediately noticed a problem. The bank reconciliations did not add up. In addition, the reconciling amounts for the deposits in transit and checks outstanding never changed over a period of four months. What this meant was that the controller could not account for $7,500 in cash that was supposed to have gone into the water company’s bank account.

The controller notified the president of the two companies, who then notified the Fortune 500 company’s chief financial officer, who then notified me of the problem. I immediately went with a crew of my internal audit staff to the water company to perform additional procedures. By the time we were through with our investigation, we found that the bookkeeper had made off with $27,000.

My company decided to press criminal charges against the former bookkeeper. The deputy district attorney who was assigned to the case had a difficult time understanding our explanation of how the former bookkeeper stole the funds. Fortunately, he finally “saw the light” and had a warrant issued for the bookkeeper’s arrest.

The bookkeeper was found in Denver and confessed to the theft. She stated she did it because her boyfriend had a drug addiction and needed the stolen money to buy drugs. The Denver judge released the bookkeeper to her own recognizance. The bookkeeper was never seen again.

My company had insurance which covered thefts of this nature. The only problem was that my company also had a $25,000 deductible on its policy.

How might this particular theft have been prevented? Obviously, had the bookkeeper been better supervised, and she knew someone would be looking at her work, she may have thought twice about taking the money. Also, it was a no-no to allow the bookkeeper to have control over bank deposits, customer accounts and the bank reconciliations. And for starters, she should have never been allowed to make the deposits. In addition, better controls of customer’ cash receipts should have been in place. Having a sign posted at the door to the water company directing customers to make their payments at the home-building offices next door might have prevented some, or even a great deal, of the theft.

Don Bays, CPA/ABV, CVA