Written by Tracy L. Coenen, CPA, CFF

On Balance – The Magazine for Wisconsin CPAs – January/February 2006

It felt like my gut had been ripped out. Fifteen years of our lives went down the drain. He took our trust and forever altered the way we view the world.

Thief on board
After 10 years in business we decided to grow our company. To do this, we needed to hire someone with financial expertise. I’m an engineer, not an accountant, so we hired a CFO named David and trusted him to protect our money.

Our expansion began and we did whatever it took to fund the company. We liquidated our retirement funds, refinanced our house, and sold company stock to David in order to raise cash.

No matter how much cash we put in, the company always seemed to be in a bind. We were selling more product than ever, yet we didn’t have enough cash to buy lunch. Each time I voiced my concerns, David calmed my fears.

Sinking ship

In fact, David was funneling money out of the company. While he was doing that, suppliers were not paid and our bank debt was growing.

David’s ultimate fantasy was a hostile takeover of the company with the money he embezzled. He set the stage for the takeover by telling creditors that I was an absentee owner with no business sense. I was the bad guy and David was the good guy who would rescue the company.

Fortunately, I realized something was wrong. We fired David immediately and locked him out of the company.

A turnaround specialist came in to determine if the company could be saved. The books hadn’t been reconciled in months, and the specialist determined that we should have had plenty of cash on hand.

He was right! When David was with us, we couldn’t even afford to buy shop supplies. Once David was gone, we had plenty of cash on hand to meet all of our operating expenses.

In the wake

Our creditors backed off so we could try to save the business. We brought in a fraud examiner to straighten out the books, determine how much was stolen, and figure out where we stood financially.

Things went well for several months, and our cash flow problems nearly disappeared. However, we were so far in debt from David’s embezzlement that the loss of one larger customer meant the end of our company. We lost everything for which we had worked for 15 years. We lost our good name and our good credit.

When I reflect on our experience with David, I realize there were red flags and opportunities to protect our company. We should have done a background check, and a confirmation of previous employment would have been helpful.

We should have been suspicious when longtime employees were fired. David ousted key employees in all areas of the company and replaced them with his own crew. Most important, he fired our bookkeeper and brought in his wife to help cover his tracks.

We didn’t have any checks and balances in place. There was no authorization required for any financial moves made by David.

On the horizon

Our experience with David altered how we do business in our new venture. We don’t trust anyone fully. We changed attorneys, changed banks, require multiple signatures for significant transactions, and use a lockbox for customer payments.

No outsiders will ever have access to our money again. We demand money from customers upfront and we don’t extend credit as easily. Nor do we ask for credit anymore. Our business is done completely on a cash basis.

We could not fathom that our business partner would ever cheat us. We found out the hard way that no one can be trusted when there is money on the table.

We also found out that we were not alone. When we talk about our experience, we often find that something similar has happened to nearly everyone. Sadly, this happens all the time.

This article was written by Tracy L. Coenen, CPA, MBA, CFE, as told to her by a client. Ultimately, the victim and his family raised capital for a new venture and they are on their way to success.

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