Here’s the first in our series of Accounting Horror Stories, the gruesome and haunting tales of how things can go horribly wrong in accounting and bookeeping…
Do you have clients who haven’t moved their accounting to the cloud yet? Here’s a true, chilling tale about why they just might want to finally make the move.
A client, let’s call him ‘Jim,’ had a thriving business manufacturing custom medical devices. When his office manager retired, Jim hired his daughter Samantha to take her place.
Samantha had previously worked as the office manager for a dentist, so Jim happily turned everything over to Samantha. She greeted customers, collected payments, billed insurance companies, made bank deposits and kept the books with QuickBooks Desktop.
Relieved to have a family member watching over his financial matters, Jim focused on his business. Everything was going well, business was booming, his bank balances were fat and Jim was drawing a healthy salary plus generous distributions from his S-corporation. He was also glad to be providing his daughter a good job.
Then, things took a turn for the worse…
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Jim’s former business partner had stayed on as a contractor, but he and Samantha didn’t get along. So the former business partner quit and opened up his own shop, in violation of the non-compete provision of his buy-out agreement. To add insult to injury, two of Jim’s best employees left to work at the new shop.
Sales at Jim’s shop fell off, and he began having cash flow problems. Bank account balances plummeted. Paychex stopped managing their payroll when the payroll account ran out of funds. So Samantha added payroll to her responsibilities.
Jim plunged into a frenzy of work to keep his business afloat. He was working harder than ever, but somehow, he never seemed to have any extra money. Something wasn’t adding up, he even had to take out several business loans and factored his insurance receivables.
Then one day, he logged into his bank account for the first time in over a year. It seemed that Samantha had been regularly transferring cash from the business bank accounts to her personal bank account.
It started small, with tuition payments for her son’s private school. Then it grew to $1,000 every few days, a rough tally put the embezzlement at more than $20,000.
When he confronted her, she stormed out angrily. Then, upon arrival at work the next day, he discovered that the server with the QuickBooks files was gone! Eventually, after shouting matches at her apartment, he got the server back, only to find that all of the data had been wiped.
Back at the office, Jim discovered that Samantha hadn’t kept any paper copies of bank statements, credit card statements, payroll reports, vendor invoices or income records. He also discovered that Samantha had never backed up the QuickBooks files to a separate location.
When he called his CPA, he learned that they hadn’t prepared tax returns for his business for the last two years. Samantha swore she had gotten all the data to the accountant, and even showed Jim something that looked like a tax return.
Now he had two years’ worth of tax returns to file and no business records. Jim had to shut his business down, leaving him and his wife to file for bankruptcy.
To make matters worse, he began suffering some sort of cognitive decline, so he struggled to recall the details of business transactions. He wasn’t sure how many credit cards he had for the business and he had trouble remembering the names of vendors, so it was tough to distinguish legitimate payments for business expenses from payments Samantha made for her own benefit.
What lessons can we learn from Jim’s horror story?
If Jim had moved his data to the cloud, he would still have his books. If he had at least made sure that his QuickBooks files had been backed up to an external source, he wouldn’t have lost everything.
If he had given his accountant access to his books in the cloud, someone would likely have asked him about all the payments to his daughter.
If he had made sure to review bank statements and credit card statements every month, he would have noticed all the odd transactions.
Segregation of duties can be challenging in small operations, but letting one person handle everything — even when it’s a supposedly trustworthy family member — is a recipe for disaster.
About Liz Farr
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 the world.