Small Business Owner Fraud


R

Robo

Hello

I'm hoping I can get some answers on which way to go about reporting
fraud in the company I work for. I know that some of the things that go
on can't be legal, but I'm not sure how they would apply to a
Partnership company. Before I go further I want to make sure I'm in
the right group.
 
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P

Paul Thomas

Robo said:
I'm hoping I can get some answers on which way to go about reporting
fraud in the company I work for. I know that some of the things that go
on can't be legal, but I'm not sure how they would apply to a
Partnership company. Before I go further I want to make sure I'm in
the right group.

The first thing someone will ask is: how do you know.

What position are you in to know - for sure - that there is fraud.

And yes, accountants know about fraud.
 
R

Robo

This company is owned by 3 people. A husband, wife and a third owner.
The business is incorporated and has been in business for over 15
years. I know or feel that there is fraud because Items are purchased
for the home, but are never paid. I was told that because it is a small
business they can do that. I know that all collected taxes are not paid
to the local governments. I have noticed several transactions where a
customer has paid cash and it was either wiped of the books or put in
as a credit card sale, but I'm not sure how it could be balanced or
hidden like that. I have all the company data files, but I'm not sure
how to approach it. There are only 3 people in the office and I'm one
of the 3. If the information was leaked it would be obvious who leaked
it. The situation just bothers me.
 
P

Paul Thomas

Robo said:
This company is owned by 3 people. A husband, wife and a third owner.
The business is incorporated and has been in business for over 15
years. I know or feel that there is fraud because Items are purchased
for the home, but are never paid.
Obviously, someone is paying for those items.

And, since you don't have any knowledge of the accounting of those items, it
may very well be that they are not taken as a deduction on the partnership
return (thereby creating income to the owners).


I was told that because it is a small business they can do that.

Small businesses often comingle business and personal expenses. It's not
suggested, but it happens - often.


I know that all collected taxes are not paid
to the local governments.
hmmmm.



I have noticed several transactions where a customer has
paid cash and it was either wiped of the books or put in
as a credit card sale,
Now that's a novel way to hide the transaction.

but I'm not sure how it could be balanced or
hidden like that.

It can't.


I have all the company data files,

Ah, evidence obtained through an illegal act.

Return it ASAP.

You are breaking the law by taking the data.


The situation just bothers me.

Then find another job.

If indeed they are "cooking the books" it'll catch them at some later date.
You probably don't want to be there when the @#$%&$# hits the fan.
 
R

Robo

LOL Thanks for the advice. However I didn't take the company files by
stealing them. I store them off site per their request. I also use them
for developing MS access files for easy navigation and kind of the
office helper type files. We use Peachtree and it's not really made for
the business needs other than accounting. The materials in question
were bought for a new home. Well over $80,000. I think it is time for a
new job, I just didn't want to walk away knowing I should have done
something. Thanks for your help.
 
P

Paul Thomas

Robo said:
LOL Thanks for the advice. However I didn't take the company files by
stealing them. I store them off site per their request. I also use them
for developing MS access files for easy navigation and kind of the
office helper type files. We use Peachtree and it's not really made for
the business needs other than accounting. The materials in question
were bought for a new home. Well over $80,000. I think it is time for a
new job, I just didn't want to walk away knowing I should have done
something. Thanks for your help.


Remember that the data is their proprietary property, and you can't keep it
if/when you leave. And you certainly can't give it to someone else.
 
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J

jo_jo

I second Paul's advice. I've worked for CPA's who were dishonest (not
merely agressive) and it's best to just quietly start hunting for a new
position elsewhere.

Some thoughts:

1) If it is THEIR business and they are using funds from that business
for personal use, it's less of a problem. They are stealing from
themselves and no matter how they consider it, it's simply a
distribution to themselves. You mention a THIRD owner, however, that
may not be aware of this. In that case, I think there may be some
ethical responsibility to inform him, as an OWNER, if you believe he
does not know AND would be upset about this.

2) Again, the best idea is to get out of that situation, period.
 
J

Joe Canuck

Robo said:
This company is owned by 3 people. A husband, wife and a third owner.
The business is incorporated and has been in business for over 15
years. I know or feel that there is fraud because Items are purchased
for the home, but are never paid. I was told that because it is a small
It may be coming out of the owner's drawings account.
 
B

Barrnabas Collins

Hello

I'm hoping I can get some answers on which way to go about reporting
fraud in the company I work for. I know that some of the things that go
on can't be legal, but I'm not sure how they would apply to a
Partnership company. Before I go further I want to make sure I'm in
the right group.
As someone who has both worked for other corporations and
owns his own company the question I would have to ask is this
really a case of fraud or is it an case of someone who is bitter
becuase he was 1. fired. 2. didn't get that expected raise.
3. didn't get that expected promotion?
 
B

Barrnabas Collins

for the home, but are never paid. I was told that because it is a small
business they can do that. I know that all collected taxes are not paid
to the local governments
I was reading this thread and this part really stuck out. I'd be
hesitant to start out saying it is fraud without knowing the deteails.
When it comes to sales tax are you really positive it is not being
paid? I've got a client who is being hit for $5,000 in sales tax even
though they had almost no sales in that month. But the state feels
they can take $5,000 in taxes since that is amount of sales tax was
owed the month before. Never mind that their sales were down alot
that month.

Also could those collected taxes be applied against bad debts
that were taxable in past periods? Just because the sales tax
wasn't paid to xxxxxx state doesn't necessarily mean fraud.
 
R

Robo

Hello Barrnabas,

The situation has nothing to do with raises and promotions nor did I
get fired. The situation just bothers me and the more I notice the more
it stays on my mind. I'm happy with my salary and get along with
everyone there. The line where the items are bought for the home but
never paid have affected the cash flow and now we have vendors calling
wanting payment and turning some accounts into COD. The sales tax in
question is paid to a degree, but the total paid in is alot less than
what is collected.
 
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C

Catherine White

Ah, evidence obtained through an illegal act.

Return it ASAP.

You are breaking the law by taking the data.

I think I must disagree here, for a very specific reason. Copies (rather
than originals) should be kept for Robo's own protection.

Robo, you are in a dangerous situation. Because, if it becomes clear to
the wrong person that there is fraud going on (a partner who doesn't
know? an auditor of some kind?), you are in danger of being blamed and
framed.

My advice is to carefully document all the irregularities you have seen
go by, the questions you asked, of whom you asked them, and the answers
given to you. Keep this file carefully.

The other crucial part is to start looking for another job _pronto_.
Eventually fraud comes out. It's never pretty. And even if you avoid
being blamed or framed, you will be out of a job. Either the company
will go under, or the "honest" partner (if there is one) won't trust you
-- because you said nothing to them. And you'll be fired.

I still keep a file of data to protect myself from a similar situation
that was almost ten years ago. I left first, sent my data to the board
of directors, and watched the sparks fly from a very safe distance.

Catherine
 
P

Paul A. Thomas

Catherine White said:
I think I must disagree here, for a very specific reason.

I agree with what you are saying, but there is no need for him to have "all
the company data files" which includes (or so it would seem) proprietary
information, like client/customer lists, supplier information,
programs/software, etc that should have no relation to whatever fraud there
may be.

While he may have been asked to keep it off-site for backup reasons (which
sounds odd to me to begin with) he can't keep that data if/when he leaves.
The reason it sounds odd is - why isn't the owner keeping that data him/her
self? I certainly wouldn't want a staff person walking off with all my
back-up data. While I may ask them to assist in the backup process, I want
the disk/tape/CD to go home with me.

If this is of grave concern to him, he should consult with an attorney ASAP
to begin to firm up his legal liability and position. It also gives the
ability to have discussed the matter ~before~ anything "hits the fan" and
you are scrambling to explain it to someone while you are in panic mode.
 
B

brecker

Best find a new job as others stated, and stay away from small business.

I built 2 companies and am now a CPA building another company in the
technology field. Do you think the money comes out of my pocket for
computers at my house? That is a little more justifiable. However, I work
with many small business owners that never report cash revenues, purchases
at Costco include many personal item. It happens everyday by thousands of
small business owners. That is not fraud, maybe tax evasion.

I won't go into the nature and extent of my relationships with those
business, but I can tell you that I have yet to met one company that does
everything 100% by the book. Yes, many of the activities my not go over well
with the IRS, but that is why we all start our own companies.

As for collecting sales taxes and not remitting them to the State/City, when
they get audited it might come to light. I guess you could make an anonymous
phone call. That activity is a little more serious.
 
D

Dexter Jetster

Joe Canuck said:
It may be coming out of the owner's drawings account.

Or it could be offsetting a Note Payable -- Shareholder account.

~d. jettster
 
B

Barrnabas Collins

Best find a new job as others stated, and stay away from small business.
Why? I've found large corporations are even more apt to commit fraud.

I built 2 companies and am now a CPA building another company in the
technology field. Do you think the money comes out of my pocket for
computers at my house? That is a little more justifiable. However, I work
with many small business owners that never report cash revenues, purchases
at Costco include many personal item. It happens everyday by thousands of
small business owners. That is not fraud, maybe tax evasion.
And i've found many large coporations do this to an even larger
extent.
As for collecting sales taxes and not remitting them to the State/City, when
they get audited it might come to light. I guess you could make an anonymous
phone call. That activity is a little more serious.
I would not assume they are doing anything illegal. How do you know
they aren't taking legit deductions?

If you're going to alledge tax fraud then make sure you have
iron clad evidence and that you know 100% of the story.
 
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B

Barrnabas Collins

The line where the items are bought for the home but
never paid have affected the cash flow and now we have vendors calling
wanting payment and turning some accounts into COD.
This is one of the things that bothers me in this case. There are
vendors who will send out double/triple/quadruple bills and then
bithch and moan collection when the second and third bill is not paid
even though the bills a duplicates.

Also how do you know the bill was sent to the corporation and
not paid by the individuals on their personal credit card?

The sales tax in
question is paid to a degree, but the total paid in is alot less than
what is collected.
And how do you know that what was paid is wrong?

I get the impression you're jumping quickly to conclusions
when you may not have all the facts.

For example on sales tax have you gone through every relevant
document/etc. related to sales tax? Done the same for bills?
 
B

brecker

Why? I've found large corporations are even more apt to commit fraud.
What is your definition of large? Large public companies, or are they still
closely held? Generally, larger companies, even non-public, have more
internal controls, segregation of duties and, depending on the structure,
more board oversight. Public companies are another question. And to me large
means public. Some company doing 5-25 million is not large. If he found
himself a nive middle market company, over 100 million, I sould say he
wouldn't come accross the owner managed activities that most small comapnies
engage in and that he doesn't like.

And i've found many large coporations do this to an even larger
extent.
Could be. Everyone has the same goal, pay less in taxes. But again, in
larger companies there are generally not the owner managed problems. Maybe
financial statement massaging.
I would not assume they are doing anything illegal. How do you know
they aren't taking legit deductions?

If you're going to alledge tax fraud then make sure you have
iron clad evidence and that you know 100% of the story.
Wrong! You don't need all the facts.

How do you think most corporations and CPAs get in trouble. Some little old
lady reads a newspaper article, cuts it out and sends it to the State Board
of Accountancy and/or the IRS/State. If an individual has the feeling that
something is wrong, they can may a anonymous phone call. I have seem CPAs
markup audited financials from the prior auditor and send them in. I have
declined to continue auditing or working with clients where I have had
serious issues regarding integrity of management. Never made a phone call to
the IRS, but could have. And, have seen former employees of clients do just
that. Don't feel sorry for them when it happens.

In this particular case, taking inventory or cash without reporting the
income is one thing. Not fraud, but tax evasion. However, if a company is
collecting sales tax and then cancellig the order, they are not just
stealing from themselves, but they are now committing fraud by not remitting
sales taxes collected. Sounds like they had all the parts to fraud, forget
what they are but intent is key and they had it.

All he has to do is send a note to the State Department of Revenue or City
finance and they will go out and perform an audit, which they do every day
in every state and most major cities.

Furthermore, one of the only two parts of Sarbanes-Oxley that applies to
private companies is the Whistleblower protection. His employer can't fire
him even if he turned his employer in. They probably would anyways, and it
wouldn't be worth the fight, but again the protection is there so people can
report questionable actions.
 
B

Barrnabas Collins

What is your definition of large? Large public companies, or are they still
closely held? Generally, larger companies, even non-public, have more
internal controls, segregation of duties and, depending on the structure,
more board oversight.
And large corporations have general screw the public, screw the
honest thing to do. Ethics are for stupid people. Escpedially if
they do work for the defense department.

Wrong! You don't need all the facts.
And how do we know this person is aware of all the facts?
 
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J

jo_jo

I think, and I could be wrong, that Texas will pay you 5% of any
underpayment collections they make for reporting companies not paying
their share of sales tax. Not suggesting that in this case.

Sales tax is a hugely, HUGELY complex issue. Lots of things that you
would think are subject to sales tax aren't, and the opposite is true
as well. It is difficult for small businesses, like the one in this
case, to manage the rules and regs sometimes. Normal CPAs in their
small audit/federal tax practices often don't have the expertise to
deal with this issue.
 

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