What? Another Bad Bookkeeper?!

Again I was with the supermarket company which had about 100 stores, and it was time to perform some interim audit testing for the external CPA firm. Now, a supermarket company is generally a low risk audit. Assets are easy to verify, the sales are all cash, inventory turns over quickly – there are not many places on a balance sheet to hide fraud. (Then, naturally, there was the Phar-Mor fraud. Here is a good summary of inventory fraud – https://www.acfe.com/resources/view.asp?ArticleID=18 )

Our supermarkets were allowed to open charge accounts for local non-profit organizations and fishing boats, but organizationally speaking, the entire Accounts Receivable wasn’t very material. Nevertheless, the external auditors insisted in at least testing the balances by confirming A/R at 5 stores. The internal audit department was tagged to perform this work. I do not like random audit testing. There is too much opportunity to miss something significant, regardless of the statistical science. That’s one reason I’m an internal and not an external auditor. A census beats a sample every time.

So I decided to try and make this tedious assignment a little more interesting. The supermarket financial statements were trued-up once a quarter, including accounts receivable. Write-offs were generally done once a quarter. So I manually keyed in the store sales for the quarter and the accounts receivable balance at the end of the quarter for all 100 stores for 4 consecutive quarters. This didn’t really take very long to do. Then I did some simple computations of the number of days sales represented by the accounts receivable balance. I wanted to pick 5 stores to confirm that looked unusual or significant. In addition, I was looking at the gross value of A/R, too. A tiny store with a tiny A/R balance did not interest me. So I ended up choosing 3 of the larger balances, even though there was nothing unusual about the balance compared to the sales. There was one store where the A/R balance spiked unusually high in one quarter, so I chose that store. And then there was a small store (but not tiny) where the A/R balance compared to sales was increasing every quarter while sales remained constant. That looked odd. I was familiar with the store and there was no particular reason this should be happening, as far as I could figure.

Each quarter, the store was not required to send in a detailed list of customer account balances that totaled to the amount on the balance sheet. The balance was a running balance computed based on the credit sales and payments that were keyed into the store accounting system each day. Adding up the individual customer balances and tying them to the store accounting balance was one test we did when we performed our store audits. I made sure to choose a quarter ending date for confirmation and notified the stores of the fact that I was going to confirm the balances. I asked each bookkeeper to copy the detailed customer account sheet that included the confirmation date and send it to me so I could confirm the balance listed. This was back when the bookkeepers had a paper card for each customer and recorded by hand the date of the sales on account, the payments made on the account, and the running account balance.

Confirming A/R is a real pain because there are always timing differences that the customer does not understand and there are always customers who do not return the confirmation or don’t know their balance or intentionally report a discrepancy, etc. But it’s still a pretty decent internal control procedure, as long as it’s done independently of the A/R function.

So I got busy sending out the confirmations to the customers based on the detailed account card balances, and actually enjoyed the non-routine process of receiving and tallying the returned responses. Everything was going along pretty smoothly. The one store with the big spike in A/R balance was near my home, so I stopped in to ask about the situation. It turned out that this store had a number of fishing boats as customers and they would load up with 6 to 10 grocery carts worth of product at a time and then put out to sea. They would pay off the balance when they returned with their catch. The balance had seemed to spike on June 30 but the explanation was reasonable and was supported by subsequent collections.

Then there was the other store with the steadily climbing balance. Naturally, at some point, I had to match the balance I was confirming with the balance on the balance sheet. I was not concerned with that step because it would be routine, so I saved it for one of the last steps. That’s when I ran into a problem. At this one store, the amount on the balance sheet was about $12,000 higher than the total from the detailed customer account cards that the bookkeeper had sent me. Well, now, THAT was curious!

Now, the only way to get a customer account balance reduced was to receive a payment or to write off a portion of the balance. As I’ve mentioned in an earlier story, store managers hate to write off any balance as a bad debt. It could impact their performance incentive bonus. So they pay attention to the bad debt expense.

If a customer makes a $500 payment and the bookkeeper steals it, there are 2 options. If the payment is properly entered into the accounting system, the accounts receivable balance will be correct, but the cash office will be short by the $500. If the payment is NOT entered into the accounting system, the cash office will balance without the $500 and the bookkeeper can pocket it. But the accounts receivable balance will NOT reflect the payment and will be overstated. If you try and confirm the overstated amount, the customer will complain that their balance could not possibly be that high because they made payments.

So the bookkeeper would steal some or all of a payment, record the payments on the customer’s detail account card, so that was accurate, but would not record the payment into the store accounting system.

 

So I had confirmed the balances that were on the detailed customer account cards, which were accurate, and which the customer’s agreed with. But the total was $12,000 less that what it should have been. We were missing $12,000.

I made an appointment to visit the store in person and gave a brief summary of what I had found to the store manager. I made sure I got to the store about 2 hours before the bookkeeper’s shift. When I got to the store, I was able to see all the detailed customer transactions on all of the customer account cards and noticed that the bookkeeper had recently gotten a little sloppy. If the customer made a payment of $520, the bookkeeper recorded a payment of $120 and a “write off” of an even $400. It was more convenient to pocket the even amount as opposed to the exact payment amount.

I pretty much had her dead to rights, so to speak. But it was a little bittersweet. She had recently had her first baby and her husband had been fired from his job at the post office. She had a real need, an opportunity, and a rationalization that she might be able to pay it back some time. Those 3 things are generally considered to be what are required for an otherwise “honest” person to commit fraud. This was a bit of a sad case.

When she came in to talk to me, I simply explained that it had this discrepancy between the accounting system balance of A/R and the detailed records and asked her to explain it to me. She dropped her head, took a few deep breaths, and simply said, “You got me.”I asked her to estimate how much she might have taken of the the past year or more. I asked if it could have been $12,000. She said there was no way it could be that much. It was maybe $3,000. We did some simple math – say $200 a week, 50 weeks, $10,000? No, she said, maybe $6,000 but it couldn’t be more than that!

Thieves are often amazed at the total they have absconded with. It seems like a small amount each time and they trick themselves into believing it’s just not very much. When they are confronted with the truth, they are usually surprised.

I was respectful and understanding and non-judgmental, and asked her to write a simple narrative of what had happened. She did and signed it and left. She admitted to stealing $6,000 but we’re sure it was $12,000. I testified in front of a grand jury, she was indited and pleaded guilty. I think she served 4 days in jail.

 

 

 

 

 



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This entry was posted on July 12, 2011 and is filed under Fraud and Embezzlement, Retail Operations, Small Business Advice. Written by: . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.