The Tale of the Out of Control Controller
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
Liz Farr, CPA, spent 15 years in tax and accounting at small firms in Albuquerque, NM. Besides tax returns of all flavors, she worked on audits of governmental entities and not-for-profits, business valuations, and litigation support. Now she's a full-time freelance writer specializing in content marketing for accountants and bookkeepers around...