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Financial Fraud: How it Can Cripple Small Businesses

Nov 12, 2013adminNo Comments »

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Today’s post comes from my friend and guest blogger Eric Williams, a business broker with Codiligent, LLC. Eric wrote the following:

“I’d like to share a cautionary tale about financial fraud – something that is more prevalent than many people believe. I have a friend who owned a second-generation, multi-state-location manufacturing company and after decades of successful operation he needed to replace the business’ retiring controller. He was very excited about the new controller – someone with impeccable credentials and experience. One of the first things the new controller suggested doing was to replace their old accounting and operations software, with a fully integrated Enterprise Resource Planning software program. The implementation was complicated, took months to get people fully trained, and my friend never became comfortable with the data he was getting from the financial reports.

After about another year, the owner still wasn’t getting information from his controller that he could understand, particularly given that their numbers seemed different than he expected based on his experience with the company’s production level. The owner assumed that he simply was not sophisticated enough to understand the controller’s financial explanations, so he brought in an outside consultant to help him understand things better. To his shock and dismay, the outcome of hiring that consultant was that fraud was discovered. After a lengthy secret review they determined the source of the fraud was the controller, who was promptly fired and prosecuted.

Unfortunately, terminating the controller didn’t immediately solve the problem. Untangling and correcting the problematic financials and operating system required significant time, effort, energy, and focus. When combined with the time necessary to implement new systems, hire a new controller, and prosecute the former controller it required about one-and-a-half years during which time the business would not have been very marketable. After they corrected the problem and had another two years of problem-free operations they sold the business.

The problem with fraud is that victims assume it isn’t happening to them, or that their trustworthy employee would never do such a thing.”

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