A Case Study in Bookkeeper Fraud

I am sitting in my office one day when the phone rings.  The voice on the other end said “I think my business has been the victim of bookkeeper fraud and I am looking for a forensic accountant in Connecticut to help me prove it”.  The following is the actual story of what had happened.

I met with the business owner.  For the first time in over 20 years, he had looked at one of his business bank statements.  What he found both amazed and confounded him.  In our first meeting, he confided in me that he always felt like his company should be making more money.  He always wondered why he was having cash flow issues.  Now he knew.

Bookkeeper Fraud Facts

His bookkeeper had been with him for 20+ years and ran a manual accounting system that he did not understand.  The business owner only reviewed the monthly financial statements provided to him by his bookkeeper.  He did not review invoices, sign checks, or review his bank statements.  As a result, his bookkeeper was writing checks to herself and putting them into her personal bank account and then showing the payments as payments to accounts payable vendors on the company financial statements.

I reviewed the monthly financial statements and corresponding journals, bank statements and cancelled checks.  Here is what I found – the bookkeeper had been embezzling funds in this manner for the entire time she had been employed by the company – over 20 years!!  The bookkeeper stole an average of $1,500 per month for 20 years for an estimate total embezzlement of over $360,000.  No wonder the company never seemed as profitable as it should have been.

Here’s the amazing part – this example of bookkeeper fraud was completely preventable.  One review of a monthly bank statement and corresponding cancelled checks would have exposed the fraud the first time it happened.  It was only because of poor internal controls and way too much trust by the business owner that this small business fraud was allowed to go on for so long.

Ted Lanzaro is the founder of Forensic Accounting and Investigative Services with offices in Cheshire, CT.  Mr. Lanzaro is a Certified Public Accountant, Certified Fraud Examiner and Certified Forensic Accountant in Connecticut specializing in small business fraud investigations, divorce litigation, business valuations, economic damage calculations, litigation support and expert witness services.  For more information, check out his website at www.ct-forensic-accounting.com or call his office at 203-922-1742.