Tips for Expanding

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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

expected raise.

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:

Evaluate policies. Sit down with an accountant and review

internal control procedures. Make sure they are being adhered to.

Segregate duties, particularly with regard to cash. The

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


Perform active oversight, particularly in small companies.

"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."

As for locating the perpetrator, in O’Donnell’s experience,

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

potential investors.

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

Top Of Page
Tips for Expanding

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

their businesses:

1. Frame the idea. Describe the business on paper in terms

of the concept, the target market, resources to be implemented, and

marketing plan.

2. Do a sales and expenses projection. The easiest


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

trade organizations.

If unable to complete the sales and expenses projections with

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.

3. Determine potential sources of money outside of


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.

4. Put together a professional team, including an


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:

Set up and monitor the business’ books, which are


via the accounting package.

Train the owner and bookkeeper to use the accounting


Prepare the profit and loss statement and balance sheet,

to ensure that no errors have been introduced through improper use

of the software.

Do the tax work.

Cernero, who has offered a version of this workshop for close

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: 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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