Industrial Distribution

Jack Keough

How to lose millions and not realize it
September 22, 2006

A recent newspaper article caught our attention and should serve as a warning to any small or medium-sized company that it’s more than a good idea to have a check-and-balance financial system in place to avoid embezzlement.

The story concerned a businessman who had started a construction supply firm. As his business grew he started two landscape supply distributorships and at the same time became a successful contractor. In all, he had several businesses and needed someone to help oversee the operations. He hired a bookkeeper, whom he came to trust without reservation, at a salary of $40,000.

His businesses were exploding in growth, but he soon got into a cash-flow problem. Essentially, he was being ripped off and he didn’t even know it. It started off small in the year 2000 when the bookkeeper stole $30,000, but escalated as time went on. By 2005 she was stealing more than $2 million a year. She kept her private life a secret. Unbeknownst to her boss, she built a beautiful home in Vermont, threw lavish parties, bought show horses, picked up tabs at many restaurants, and spent money at an astounding rate. At the time the thefts were uncovered, she was planning a $1 million wedding for her brother. None of her colleagues knew about her other life in another state where she spent weekends and vacations.

Before she was caught she had taken more than $3 million from the till. She had covered her tracks by writing phony vendor invoices.

The owner of the company was astounded that she could have taken that much money. Meanwhile, he was forced to shut down a few of his businesses, lay people off and restrict growth plans.

How could this happen? It’s easier than you think.

A few years ago, the president of a manufacturing company in our industry called me almost in tears.  He was planning to retire and put his business up for sale. When it came time to review the books he found out that his controller had stolen more than $1 million in small amounts over the years. This employee, who operated as his CFO, was one of the owner’s closest friends. He had been taking the money for years.

“I trusted him completely,” the business owner told me.

Retirement plans were put on hold as he rebuilt his business. And it took him four more years before he could get an acceptable price for the company.

An electrical distributor in the Northeast was faced with the same problem a few years ago when a warehouse employee stole thousands of dollars in tools. The employee, who had a drug problem, would slip tools under his coat as he left work and then sell them on the street. His scheme was simple: empty some boxes of tools, put the tools under his coat (or leave them covered by the warehouse door) and walk out with them. He put the empty boxes back on their shelves.

The thief was caught but was not prosecuted. Instead, he agreed to resign. The kicker to this story: the thief actually applied for a job at another distributorship in Pennsylvania and had listed the owner of the electrical distributorship as a reference.

The owners of these businesses are smart businessmen who failed to have an adequate check-and-balance system in place. Don’t let it happen to you.

Posted by Jack Keough on September 22, 2006 | Comments (2)