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
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
Fraud often occurs because too much trust is placed in particular
individuals, and they violate this trust. "In small
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
is doing the job and not stealing."
But, he warns, some of the bookkeeper’s duties may give them
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
sub-businesses or contractors. With no legitimate exchange of goods
and services, the money goes directly into the pocket of the
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
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
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
She supplied him with a hand-written check, which he then used to
pay off his personal Citibank Visa account. "Normally the
department would have had to approve the disbursement," says
"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
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
tightening internal controls:
internal control procedures. Make sure they are being adhered to.
person who is disbursing funds should not have access to the
coming back in. In small companies, the business owner or someone
other than bookkeeper should do the bank reconciliation. In larger
companies, purchasing duties must be dispersed. There should be a
series of documents, issued and approved by different people, who
perform checks and balances on each other. If more than one person
is involved, it is also more difficult for someone to perpetrate
"If you have to sell three or four people on the idea of ripping
off the company or try to make them think it’s legitimate, it’s
"From what I’ve seen, when someone has stolen, and the owner is
left to clean up the mess, he was not paying attention." The owner
should question anything unusual. If there is no cash crisis, then
notices that certain bills are not being paid should raise eyebrows,
and he should examine things that do not reconcile in the books.
out of ten times, there will not be fraud," says O’Donnell,
owners need to be aware."
once fraud has been revealed, the person usually comes clean. As an
investigator, he refrains from moral judgment. He explains that the
perpetrator usually feels guilty about committing a crime. "If
you present yourself as not being threatening," he says, "they
usually spill out their guts and tell you what happened." If not,
a careful review of the documents tells the story. In the case of
the chief financial officer, while he was on vacation, his assistant
noticed a Visa number written on the back of a check, when he was
doing the bank reconciliation. When he ascertained that the Visa
belonged to the CFO, he put an investigation in motion.
When the perpetrator is located, management sometimes tries to hide
the problem from the public and will come to an informal agreement.
If the person agrees to make restitution, then the company agrees
not to prosecute. O’Donnell says, "This happens more often than
you think. Initially, management wants to put the screws to the guy,
but then reality comes in." The company realizes that the
of fraud may reflect badly on the company’s operations to banks and
O’Donnell graduated from LaSalle University in 1982 with a degree
in accounting and finance. He began acquiring his financial
skills when he worked for the federal government, handling military
sales funding, including applying costs for military purchases made
by the Republic of Iran. In 1985 he moved to a professional consulting
firm that provided accounting services in support of the international
tribunal against the Republic or Iran; this work involved assets
subsequent to the Iran hostage-taking. In 1989, when this program
was winding down, he took a position with Nihill and Riedly, a small
forensic accounting firm that investigated, among other things, fraud.
In 1999, he moved to Withum Smith & Brown, where he now heads up the
litigation group, working hand in hand with attorneys on civil
contract and shareholder disputes, termination of business, and fraud
When he speaks about fraud, O’Donnell emphasizes the need for internal
controls. Because perpetrators of fraud are usually ordinary people
with a need who exploit an opportunity, fraud can happen anywhere.
O’Donnell says, "I want to blow away the misconception that a
crook gets hired. Anyone can steal."
— Michele Alperin
Money per se is not the critical issue in starting or
extending a small business, explains Nunzio E. Cernero, director
of the Center for Training and Development at Mercer County Community
College. "It’s not how much money you have, but whether the amount
of money you have supports the idea you have." Cernero’s approach
to small business is referred to in the business literature as
— starting within your resources and then expanding by using
cash flow for the next step.
Cernero will present his ideas in a 15-hour workshop entitled "A
Creative Approach to Starting or Expanding Your Small Business,"
on five consecutive Thursdays, beginning on January 18, from 7 to
10 p.m. The workshops, offered at Mercer County Community College
under the auspices of the Small Business Development Center, feature
funding, marketing, financial management, and legal factors. Call
609-586-9446 to preregister.
To entrepreneurs who want to expand a small business, Cernero offers
an ongoing evaluative process that frees business owners to market
of the concept, the target market, resources to be implemented, and
is to find sales and expenses for similar businesses, using readily
available sources, including Internet sites of similar businesses
as well as articles about those businesses; the Internal Revenue
Annual Sole Proprietor’s Report; and reports on sales published by
available resources, the owners themselves should survey the market.
They might run focus groups to determine what the target market would
buy and what it would be willing to pay for the projected product
or service. Another possibility is to distribute a marketing survey
on the Internet or among friends and relatives.
The result of this step is a paper evaluation of the business idea
and the amount of cash needed for implementation. "Often people
start businesses and don’t look at what it costs to implement their
idea," says Cernero, who encourages potential owners to look for
ideas that fit within their resources.
Although borrowing is an option, Cernero believes that methods of
maintaining a high level of cash, without borrowing, are even more
important. He says, "Borrowing is not the issue; it is having
enough cash to implement the idea. You should maximize the cash you
generate and minimize the cash you have to invest." He offers
the following suggestions for increasing cash on hand that do not
involve going to a bank:
Lease equipment in order to keep the initial investment low and spread
payments over time; bring in cash as quickly as possible; set up a
good accounts receivable system so that customers pay on time and
ask for down payments whenever possible; get the best terms possible
from vendors, paying later rather than sooner; and look at personal
assets that might be sold.
When borrowing is deemed necessary, owners should investigate the
Small Business Administration and bank programs. They should also
speak to the economic development departments, whose mission is to
pull in business to aging cities, and they may offer good terms.
an insurance company, and an accountant. "The owner needs to
spend his time selling the business and depend on the professional
team to do the details. He needs to delegate out services," says
With respect to financial management, the owner must choose an
in concert with a good accounting package and an efficient payroll
service. Cernero advises, "Leave the accounting up to the
But the owner must also negotiate up front which among the following
services the accountant will provide:
via the accounting package.
to ensure that no errors have been introduced through improper use
of the software.
to 27 years, first became involved with entrepreneurship through
Achievement. He earned a degree in management engineering from the
New Jersey Institute of Technology in 1963 and has an MBA from
Illinois University. After working for eight years at New Jersey Bell,
he decided to open his own business, a small business accounting
in Mercer County. As a volunteer, he did workshops with the Small
Business Administration and started the Small Business Assistance
Center at Mercer County Community College. Only a handful of these
centers were operating nationally at that time.
Eventually Mercer hired Cernero full-time to implement a Small
Development Center. Simultaneously he started the Center for Training
and Development (E-mail: firstname.lastname@example.org or 609-586-4800, extension
"Once I got here full time, my boss asked what we were doing for
big companies," says Cernero. Operating on the principle that
each organization has unique training needs, the center customizes
the courses and seminars offered in the college’s classrooms. Now
Cernero has 11 staff people who market, schedule, and design the
programs for 15,000 workers annually, both at the college — for
computer classes — and at corporate sites. He draws from a pool
of 40 consultants who teach more than 1,000 sessions per year. The
more than 100 client companies and agencies include Princeton
the State of New Jersey, Marriott, Staples, FMC, and Janssen
Cernero also supervises the state contract that gives entrepreneurship
training to the unemployed.
The financial management model for entrepreneurs that Cernero suggests
is ongoing. "It not only describes the starting point, but how
much money I need to go on to the next step," says Cernero.
model becomes a measuring stick."
— Michele Alperin
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