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The Tale of the Out of Control Controller

Oct 17th 2018
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Our series of horrific examples of how things in accounting can go wrong continues as we bring you the terror of what happens when an unethical, incompetent controller meets zero oversight.

My co-worker, ‘Peter’ and I were sent out on an emergency call as the controller for ‘Bright Light Solar,’ I’ll call it, had quit abruptly and payroll needed to go out the next day. Our firm had been hired to provide remote controller services, so we went out to get payroll done and to scope out the situation.

Even though this was 2006, Bright Light Solar’s accounting system used a DOS interface. Fortunately, Peter was a bookkeeping and computer whiz, so he figured it out and got payroll done.

Meanwhile, I sat at the desk of the ex-controller, a CPA we’ll call ‘Dirk,’ and started looking through his files. I found his monthly bank reconciliation spreadsheets, which superficially looked fine, but when I checked the formulas, they just didn’t add up.

The formula errors meant that cash that was always overstated and his spreadsheets included a reconciliation of petty cash. The last one showed a petty cash balance of around $800, but the unlocked lockbox contained only about 50 cents.

I then spotted a neat stack of papers on a shelf by the window containing an inch and a half of IRS and New Mexico state tax and revenue notices, all of which were about mistakes in payroll tax payments. It seemed that Dirk’s approach to paying payroll taxes was to pay ‘something’ and wait for the taxing authorities to tell him what the company really owed, plus penalties and interest. 

The Danish owner of Bright Light Solar had only rarely visited his business and had relied completely on Dirk to handle all of the financial matters. A competent manager oversaw the manufacturing operations, a part-time receptionist answered the phone and Dirk had free rein of the rest. The owner was in the middle of negotiations to sell the business, so he wanted us to wrap things up quickly.

We scooped up what documents we could and headed back to the office. My colleague Roxanne was assigned to finish up the final bookkeeping and the owner gave her access to the bank and credit card accounts so she started downloading statements.

She then began noticing some odd transactions that didn’t make sense for a solar manufacturing company, such as:

  • Suits from The Men’s Wearhouse
  • A bicycle and helmet from a local bike shop
  • Meals from high-end restaurants
  • Lots and lots of cash withdrawals from an ATM at a local casino

With no oversight, Dirk had been brazenly stealing from the company, which is probably why he left so abruptly.

In total, Roxanne found approximately $50,000 of odd transactions made by Dirk. She asked the owner of Bright Light Solar if he’d like her to put the information in a report to take to the police, but he said no, he just wanted to get the company sold.

At about the same time, we heard that one of our clients had hired Dirk to be their controller, which put us in an ethical dilemma. Do we tell our client they made a bad hire, which would require us to reveal what we’d learned from a sensitive situation with another client, violating their confidentiality? Fortunately, our client had better oversight of their controller than Bright Light Solar did and before we could figure out what to do, they fired Dirk for incompetence.

I’m not sure what happened to Dirk after that, most likely he left town to ply his talents, such as they were, elsewhere.

The Moral of the Story

Even if you hire a CPA (controller or otherwise), that’s no guarantee of ethical behavior. At the very least, business owners should review bank and credit card statements for unusual transactions.

It’s also a good idea to review payroll reports and payroll tax payments to ensure that tax payments are being made correctly. A careful and thorough check of Dirk’s past employers might have alerted the owner to his basic incompetence.

Next week: why you should fear death bed estate planning

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By Michael Abrams
Oct 20th 2018 08:44 EDT

Excellent article. EVERYONE in an organization needs checks and balances...Especially the "trusted" "professionals".

In fact, I'm not a big fan of the "one stop shop" that many CPAs are engaing in - that is, the CPA is the bookkeeper, tax preparer and financial advisor. I think it's better for the client to have the bookkeeper/tax return function seperated from the fianancial advisor roll. It's good to have a second set of eyes review things, in my opinion.

Regarding the client that ended up hiring "Dirk": That would be a problem for sure, although I would think the owner Bright Light Solar wouldn't object to informing folks of Dirk's "inconsistencies". I would certainly ask for permission, at the very least.

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By CameronRobertson
Oct 24th 2018 01:20 EDT

This sounds like a real d disaster waiting to happen. It's just a lucky break that this company is small and that they haven't come across bigger problems while doing this. I really wouldn't want to take the risk that this might happen in my company though. Even those few dollars lost through accounting errors makes a difference when you are running your own outfit. Best to make sure that you have a proper system set up and that it's properly maintained if you want to be handling all your own books. It all adds up in the end if you don't take the proper care!

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By StephenGiderson
Oct 25th 2018 00:41 EDT

It is never an easy task when it concerns finances. It requires a keen eye to detail before someone can detect any discrepancies. This is why a controller should be the last line of defence in the finance department. If this person fails to rectify any problems right from where they started, then obviously the issues are just going to further accelerate into bigger problems that have been accumulated.

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