CASE 3: FICTITIOUS VENDORS ON CHECKS AND CHARGES
In this case, the board of a large condominium building contracted with an outside management company to handle the operations of the building, including selecting vendors when repairs were needed as well as paying those vendors. The board received reports and statements showing who got paid for what and when.
Everything seemed fine until I was contracted to perform an annual audit, during which I asked for copies of invoices detailing what made up the repairs’ expense. The resident manager, who worked for the management company, seemed annoyed and was unresponsive to my request. I finally decided to leave the field and explained to the client that I couldn’t complete my work until I received this documentation.
I never heard anything more from the client until a year later when it was discovered that this manager had opened up a bank account in the name of a fictitious repair company, with him as the owner. He routinely wrote checks to this “company,” depositing the checks into this account. In this case, he had dummied up invoices for the board to see, but no one ever questioned who this company was. I think he knew better than to give them to me. I found out what had been happening when the association called me to testify in court against the man. He had taken over $60,000 using this method.
Preventive Internal Controls:
1) Segregation of Duties: Having a board member sign all checks for expenses other than repeating ones such as the water bill can help discourage this behavior. Invoices should be reviewed before the check is signed. In this case, since the board member lived in the building, implementing this control would be easy, but this may not always be a practical solution.
2) Board Review of Vendors: Have someone on the board review a list of bills paid, organized by vendor. This report is actually already in QuickBooks: “Expenses by Vendor Summary Report,” and can be found in the reports menu. The board member should live in the same city as the nonprofit in order to be familiar with the major vendors in the area. A quick check online should be made for any vendor the board member doesn’t recognize, and if the result doesn’t satisfy the board member, a call should be made to the vendor. The only issue this problem wouldn’t address is if the actual check wasn’t written to the vendor name listed in the vendor report. This brings me to my last case.
Repost by Gregg Bossen, CPA