Fraud - Watching Your Margins

Fraud is a serious problem for business owners, one that can set your company back hundreds of thousands of dollars. To help you learn about common types of business fraud, we’ve asked fraud investigator Scott Rebein of SFR Consulting and Advisory to share his experiences with financial and business fraud. 

Here’s the story: you are working harder than ever and you have a growing client base, but your profit margins don’t seem to be growing in line with your increased business. You feel you should be more profitable. What could be wrong?

In my 28 years of experience as a federal special agent conducting financial fraud investigations, I have seen very unfortunate situations for business owners, regardless of business size or economic environment. Below are true stories, generalized to protect those involved and due to federal disclosure laws.  

Story 1: The Invoice Scheme

Our first example is a woman who was an office manager for a thriving, four-dentist dental practice. She was trusted to handle all matters in the office and, unfortunately, had signature authority on the practice’s bank account. The practice was very lucrative, but a quick calculation showed that there was a profitability issue at the practice.

After a thorough investigation, it turned out that the office manager’s husband had a gambling problem and the couple could not pay their bills. The manager therefore decided to establish two separate shell companies and related bank accounts. She notified legitimate vendors that the dental practice’s name had changed, and began receiving invoices from these vendors for supplies and services. She then created new invoices with a bump up in cost, not noticeable to the dentist owner or the outside CPA firm, and would pay the original, legitimate vendor from the established accounts and had free use of the additional proceeds remaining in her accounts.

The scheme ran for over 6 years, and the office manager was able to steal over $300,000 from her employer. Even though the subject is now a felon, the dental practice never recovered the money as the husband was not a good gambler. The practice also had to spend significant time and money amending many years’ tax returns.

Story 2: The Accounts Receivable Scheme

In another investigation, a young man was employed by a mid-sized computer company as a bookkeeper.  He had been with the company since its inception and was a very dedicated employee, working constantly. The owner was very confident in the work and loyalty of the bookkeeper since he had been with the company for so long, and had stopped any oversight of the books and records due to the volume of business and lack of time. 

One day, the bookkeeper did not show up for work, which was extremely rare. A client company called to ask an urgent question about an invoice from the prior year, and a secretary handled the call. When the secretary went pull the records related to the invoice, she could not find any records. There were a number of invoices for this client, just not that particular one. When she received a copy of the invoice from the vendor to help in her search, the invoice was slightly different from the others. An investigation uncovered that the bookkeeper was diverting vendor payments into a different bank account that he had set up with official business documents, then removing the invoices from the system.  

It turned out that the bookkeeper had been conducting this accounts receivable scheme for over 8 years and had stolen nearly $1 million from his employer. The company was able to sue, but only recovered 15% of their lost income. The bookkeeper went to prison for fraud and tax evasion.

About SFR Consulting & Advisory

At SFR Consulting & Advisory, we provide reactive investigative services and proactive internal controls design, implantation, training, assessment, and periodic monitoring, among other investigative services. Designing and implementing comprehensive internal controls in both cases above could have prevented the loss of significant income. Having an outside, independent company with complex financial fraud detecting experience to assess, design, implement, and periodically monitor internal controls can minimize the risk businesses face in the conduct of business. Don’t become a victim of financial fraud, and if you have been or are being defrauded, it’s not too late to take action to protect your financial interests.