When Peter Can’t Pay Paul

IAG was engaged to investigate a theft loss claim for an insurance company. When reviewing the evidence, the insurance adjuster asked in confusion, “Why are they only depositing money twice a month?” Very simple. It takes time to accumulate enough checks in Peter’s safe to pay for Paul’s cash.

One December, the manager of one of the retail locations, Jean, decided she didn’t want to scrimp for Christmas, and stopped depositing funds for the latter part of the month. The absence of weekly deposits weren’t initially missed by the company’s controller, and he called Jean, demanding the deposits be made immediately. Several large deposits cleared the bank beginning of January, but supporting deposit slips never arrived at the central accounting office.

The controller ran the point-of-sale reports from the centralized accounting system. The January deposits appeared to agree with December’s point-of-sale reports. The January deposits were now running a little behind, but the money seemed to be matching up. Throughout January and into February, deposits were made late, but the controller had 20 stores in various states to monitor. Jean had been managing that store for years. She tended to run late and wasn’t terribly sharp with accounting, but she was the company’s top salesperson and great with the other store employees. If the money was being deposited, albeit late, then he had bigger issues to resolve.

By the end of June, after filing the company’s tax return, losing a key employee, finding a replacement, and finally taking a vacation himself, he called the manager again. The deposits were now three weeks behind and the company was in the dip of its annual sales cycle. There was no reason the accounting couldn’t be done in a timely manner, even for charismatic, top salesperson, accounting-challenged Jean. The phone conversation did nothing to assuage his concerns. He couldn’t delay the cost to fly someone to the store any longer.

The business owner, and indirectly, the insurance company, were victims of a classic lapping scheme. If the controller had been able to obtain the deposit slips, he would have seen that more checks were deposited than were received per the respective day’s point of sale report. Throughout January through June, Jean maintained a juggling act, replacing yesterday’s stolen cash with today’s checks and doing the math to make the deposit total match the point-of-sale reports. To cover the discrepancy, Jean stashed the deposit slips. Later, she destroyed them. In June, when another store manager arrived to help Jean, Jean wasn’t her charismatic self, had few answers and fewer supporting documents.

The theft loss claim was $20,000, which IAG verified by matching total deposits to the cash/checks sales on the point-of-sale reports. The controller had ignored his better judgment because it’s human nature to want to give people the benefit of the doubt. He dismissed the violation of company policy because Jean was a long-time employee, likable, and performed well. The company had the necessary internal control procedures in place, but the controller’s unwillingness to recognize the red flags and incur the cost of sending someone to the store in January made those preventive measures ineffective.

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IAG Forensics

IAG Forensics & Valuation is a CPA firm that specializes in forensic accounting, fraud investigation, business valuation and litigation support.

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