Corrections or additions?
These articles by Michele Alperin were prepared for the January
17, 2001 edition of U.S. 1 Newspaper.
All rights reserved.
Crooks Aren’t Hired: White Collar Fraud
Normally white collar crime can happen in any business
where there is a person who is in need and has an opportunity,” says
John J. O’Donnell, manager of litigation support and law firm
services at Withum Smith & Brown. There is no profile of the type
of individual who commits such crimes, O’Donnell claims, and he warns
businesses that they need to establish effective internal controls
and active oversight.
O’Donnell is speaking about fraud on Wednesday, January 17, at 6 p.m.
at Good Time Charlie’s on Route 27 in Kingston. The talk is sponsored
by the Institute of Management Accountants and costs $24. Call Rebecca
Machinga at 609-520-1188.
In the context of white-collar crime, explains O’Donnell, the
perpetrator
is usually someone with a lifestyle problem that results in a shortage
of funds — drinking, drugs, or gambling. Another common motivation
for fraud is to get back at a boss who did not come through with an
expected raise.
Fraud often occurs because too much trust is placed in particular
individuals, and they violate this trust. “In small
businesses,”
explains O’Donnell, “there are limited internal controls, and
you trust certain employees and let them go about their duties.”
On the other hand, says O’Donnell, “owners have many things on
their plates, and their top priority is not to make sure the
bookkeeper
is doing the job and not stealing.”
But, he warns, some of the bookkeeper’s duties may give them
opportunities
to divert funds for personal benefit. For example, bookkeepers can
write checks to pay personal bills. Or they can write checks using
erasable pens, have them signed, and then change either the payee’s
name or the amount on the check.
Another typical occasion: A person in high authority sets up
fictitious
sub-businesses or contractors. With no legitimate exchange of goods
and services, the money goes directly into the pocket of the
perpetrator.
Although employees usually have an idea what is going on, they do
not say anything for fear of getting fired.
The issue of misplaced trust also occurs in large companies, even
those with well-established internal control procedures. “The
procedures get ignored,” says O’Donnell, “because the
perpetrator
of fraud is well-trusted and in authority.”
He cites a man who had been a chief financial officer for 15 years.
The normal internal controls prevented his access to disbursements
or cash flows. However, he identified a weakness in the internal
controls
whenever checks were written for last-minute items. To exploit this
weakness, he hired a clerk who did not understand the importance of
strict internal controls. The CFO came to her and said something like,
“I need a $10,000 check to pay marketing expenses to
Citibank.”
She supplied him with a hand-written check, which he then used to
pay off his personal Citibank Visa account. “Normally the
purchasing
department would have had to approve the disbursement,” says
O’Donnell,
“but he saw a weakness and took advantage of it. The clerk wrote
the check, because she trusted her boss.” When the check cleared
the bank, it would be reconciled as a normal check, and the
reconcilers
would never know the purpose of the funds.
Although these stories may appear to be warning business owners not
to trust anybody, O’Donnell notes that “it’s really impossible
in business.” But to lower chances of embezzlement, theft, and
diversion of funds — to avoid being a victim — O’Donnell
recommends
tightening internal controls:
Evaluate policies. Sit down with an accountant and reviewinternal control procedures. Make sure they are being adhered to.Segregate duties, particularly with regard to cash. Theperson who is disbursing funds should not have access to thedocumentationcoming back in. In small companies, the business owner or someoneother than bookkeeper should do the bank reconciliation. In largercompanies, purchasing duties must be dispersed. There should be aseries of documents, issued and approved by different people, whoperform checks and balances on each other. If more than one personis involved, it is also more difficult for someone to perpetratefraud.”If you have to sell three or four people on the idea of rippingoff the company or try to make them think it’s legitimate, it’sdifficult.”Perform active oversight, particularly in small companies.”From what I’ve seen, when someone has stolen, and the owner isleft to clean up the mess, he was not paying attention.” The ownershould question anything unusual. If there is no cash crisis, thennotices that certain bills are not being paid should raise eyebrows,and he should examine things that do not reconcile in the books.”Nineout of ten times, there will not be fraud,” says O’Donnell,”butowners need to be aware.”As for locating the perpetrator, in O’Donnell’s experience,once fraud has been revealed, the person usually comes clean. As aninvestigator, he refrains from moral judgment. He explains that theperpetrator usually feels guilty about committing a crime. “Ifyou present yourself as not being threatening,” he says, “theyusually spill out their guts and tell you what happened.” If not,a careful review of the documents tells the story. In the case ofthe chief financial officer, while he was on vacation, his assistantnoticed a Visa number written on the back of a check, when he wasdoing the bank reconciliation. When he ascertained that the Visanumberbelonged to the CFO, he put an investigation in motion.When the perpetrator is located, management sometimes tries to hidethe problem from the public and will come to an informal agreement.If the person agrees to make restitution, then the company agreesnot to prosecute. O’Donnell says, “This happens more often thanyou think. Initially, management wants to put the screws to the guy,but then reality comes in.” The company realizes that theincidenceof fraud may reflect badly on the company’s operations to banks andpotential investors.O’Donnell graduated from LaSalle University in 1982 with a degreein accounting and finance. He began acquiring his financialinvestigationskills when he worked for the federal government, handling militarysales funding, including applying costs for military purchases madeby the Republic of Iran. In 1985 he moved to a professional consultingfirm that provided accounting services in support of the internationaltribunal against the Republic or Iran; this work involved assetsfrozensubsequent to the Iran hostage-taking. In 1989, when this programwas winding down, he took a position with Nihill and Riedly, a smallforensic accounting firm that investigated, among other things, fraud.In 1999, he moved to Withum Smith & Brown, where he now heads up thelitigation group, working hand in hand with attorneys on civilmatters,contract and shareholder disputes, termination of business, and fraudinvestigation.When he speaks about fraud, O’Donnell emphasizes the need for internalcontrols. Because perpetrators of fraud are usually ordinary peoplewith a need who exploit an opportunity, fraud can happen anywhere.O’Donnell says, “I want to blow away the misconception that acrook gets hired. Anyone can steal.”— Michele AlperinTop Of PageTips for ExpandingMoney per se is not the critical issue in starting orextending a small business, explains Nunzio E. Cernero, directorof the Center for Training and Development at Mercer County CommunityCollege. “It’s not how much money you have, but whether the amountof money you have supports the idea you have.” Cernero’s approachto small business is referred to in the business literature as”bootstrapping”— starting within your resources and then expanding by usinginternalcash flow for the next step.Cernero will present his ideas in a 15-hour workshop entitled “ACreative Approach to Starting or Expanding Your Small Business,”on five consecutive Thursdays, beginning on January 18, from 7 to10 p.m. The workshops, offered at Mercer County Community Collegeunder the auspices of the Small Business Development Center, featurefunding, marketing, financial management, and legal factors. Call609-586-9446 to preregister.To entrepreneurs who want to expand a small business, Cernero offersan ongoing evaluative process that frees business owners to markettheir businesses:1. Frame the idea. Describe the business on paper in termsof the concept, the target market, resources to be implemented, andmarketing plan.2. Do a sales and expenses projection. The easiestapproachis to find sales and expenses for similar businesses, using readilyavailable sources, including Internet sites of similar businessesas well as articles about those businesses; the Internal RevenueService’sAnnual Sole Proprietor’s Report; and reports on sales published bytrade organizations.If unable to complete the sales and expenses projections withavailable resources, the owners themselves should survey the market.They might run focus groups to determine what the target market wouldbuy and what it would be willing to pay for the projected productor service. Another possibility is to distribute a marketing surveyon the Internet or among friends and relatives.The result of this step is a paper evaluation of the business ideaand the amount of cash needed for implementation. “Often peoplestart businesses and don’t look at what it costs to implement theiridea,” says Cernero, who encourages potential owners to look forideas that fit within their resources.3. Determine potential sources of money outside ofborrowing.Although borrowing is an option, Cernero believes that methods ofmaintaining a high level of cash, without borrowing, are even moreimportant. He says, “Borrowing is not the issue; it is havingenough cash to implement the idea. You should maximize the cash yougenerate and minimize the cash you have to invest.” He offersthe following suggestions for increasing cash on hand that do notinvolve going to a bank:Lease equipment in order to keep the initial investment low and spreadpayments over time; bring in cash as quickly as possible; set up agood accounts receivable system so that customers pay on time andask for down payments whenever possible; get the best terms possiblefrom vendors, paying later rather than sooner; and look at personalassets that might be sold.When borrowing is deemed necessary, owners should investigate theSmall Business Administration and bank programs. They should alsospeak to the economic development departments, whose mission is topull in business to aging cities, and they may offer good terms.4. Put together a professional team, including anattorney,an insurance company, and an accountant. “The owner needs tospend his time selling the business and depend on the professionalteam to do the details. He needs to delegate out services,” saysCernero.With respect to financial management, the owner must choose anaccountant,in concert with a good accounting package and an efficient payrollservice. Cernero advises, “Leave the accounting up to theprofessionals.”But the owner must also negotiate up front which among the followingservices the accountant will provide:Set up and monitor the business’ books, which aremaintainedvia the accounting package.Train the owner and bookkeeper to use the accountingpackage.Prepare the profit and loss statement and balance sheet,to ensure that no errors have been introduced through improper useof the software.Do the tax work.Cernero, who has offered a version of this workshop for closeto 27 years, first became involved with entrepreneurship throughJuniorAchievement. He earned a degree in management engineering from theNew Jersey Institute of Technology in 1963 and has an MBA fromSouthernIllinois University. After working for eight years at New Jersey Bell,he decided to open his own business, a small business accountingpracticein Mercer County. As a volunteer, he did workshops with the SmallBusiness Administration and started the Small Business AssistanceCenter at Mercer County Community College. Only a handful of thesecenters were operating nationally at that time.Eventually Mercer hired Cernero full-time to implement a SmallBusinessDevelopment Center. Simultaneously he started the Center for Trainingand Development (E-mail: ctd@mccc.edu or 609-586-4800, extension3279).”Once I got here full time, my boss asked what we were doing forbig companies,” says Cernero. Operating on the principle thateach organization has unique training needs, the center customizesthe courses and seminars offered in the college’s classrooms. NowCernero has 11 staff people who market, schedule, and design thetrainingprograms for 15,000 workers annually, both at the college — forcomputer classes — and at corporate sites. He draws from a poolof 40 consultants who teach more than 1,000 sessions per year. Themore than 100 client companies and agencies include PrincetonUniversity,the State of New Jersey, Marriott, Staples, FMC, and JanssenPharmaceutical.Cernero also supervises the state contract that gives entrepreneurshiptraining to the unemployed.The financial management model for entrepreneurs that Cernero suggestsis ongoing. “It not only describes the starting point, but howmuch money I need to go on to the next step,” says Cernero.”Themodel becomes a measuring stick.”— Michele AlperinNext StoryCorrections or additions?This page is published by PrincetonInfo.com— the web site for U.S. 1 Newspaper in Princeton, New Jersey.
