No one was using the supply chain management system!!

One morning, an employee mentioned there were rumors that the port would be closed due to a dockworkers strike. I asked if anyone knew how much material we had coming in. No one did. I asked if anyone knew how much was actually at the dock. No one did. I asked how much stock have we paid for that hasn’t been delivered yet. No one knew.

I was shocked – no one knew what was going in our supply chain. It was all there in the system but no one bothered to look. Clearly they didn’t look at the data everyday. I asked why they weren’t using it.

They said it was all wrong and has been since the day the system was set up, so no one uses it. I asked how they managed the supply chain and they said they’d call friends at the dock and ask what they have, then call the customs agent and ask what is coming in. I asked if this meant our physical stock records on the computer were wrong and they said yes.

Our accountant sent out a report without verifying it

We got the monthly accounts from Quickbooks and it showed a much larger profit than we had expected.  We estimates profit and cash weekly, so this was a real surprise - a pleasant one I had to admit. I didn’t really give the matter much more thought because the variance was positive. If it has been negative, I would have been all over it.

Then, driving home I began to wonder how we could have made so much profit. The next morning I went in early and started looking at the reports. Sales looked right, but the margins were way too high. We normally have around 40% gross margin but these accounts showed it a 56%. I kept looking. Most of the expenses seemed to be normal with the exception of the sales discounts, which looked really low. They were below the normal 15% level. Suddenly it dawned on me: somehow the discount had been added the to gross margin.

I called in the accountant and asked what was going on. He looked at the accounts and said they were wrong. I was right there was a misposting. I asked why he hadn’t checked the accounts and he said he didn’t feel well and had gone home. When I asked who he sent them to, he answered the bank, board, and all our investors. I told him we needed to recall them ASAP and make sure this never happens again. I told him next time he goes home without signing off on the accounts at the end of the month, he needs to tell me.

The sales team were misusing their travel privilegs

The sales people travelled a lot. The sales manager signed their expenses. I was supposed the sign the manager’s expenses. Our accountant comes in once a month to do the books. Last month he expressed his concern to me about the rising costs of the sales force. We now had three people plus the manager.

I began to look over their expense claims and noticed they were staying in expensive hotels, bought very expensive meals and drinks, and stayed overnight at places where they could easily drive home. When I questioned the manger, he said these were all legitimate expenses and it cost a lot to entertain customers. I suggested we establish an expense policy. At first he resisted but then agreed. The next month I checked and there was no real change in behavior.  I told the manager he needed to act now.

The next thing I learned through a friend was that the sales manager was seen in a hotel with a woman who wasn’t his wife in city X. I checked his expenses because he was supposed to be in city Y. There was a receipt from a hotel in city X but when I called the hotel, there was no record of his stay.

I hate confrontation, but met him the next morning. He denied everything and got really upset with me. He got very angry but couldn’t explain the situation. I told him we were going to audit all of the sales team’s expense for the past year. He got up, told me he quit, and left the building.


Transparency audit theft expense reports trust employees corruption 

We still have no idea how all that stock went missing

At the end of every quarter we did a formal stock count. When we were a real startup, we were always able to reconcile the stock and find it. As we grew, there were some discrepancies but nothing major. The differences were so small that we simply wrote them off.

Last quarter, the first stock count showed that more than 15% of the stock was missing. We counted again and found the same thing. We looked all over the warehouse and couldn’t find it. We now had six people working in the warehouse but they all said they didn’t know where the stock was.

We examined all the invoices and delivery notes and found that they hadn’t been reconciled for over a year. The accountants used the invoices to create the accounts and value the stock. The delivery notes were in piles in the warehouse office. Upon closer investigation it emerged there were no delivery notes for a number of high value items. We called the supplier and they said they were delivered. They provided signed notes to show when they were delivered. All were signed by the same warehouse operator.

When we asked him, he said he didn’t know anything about missing stock. There was nothing else we could do as there was no hard evidence of fraud. We tightened our controls and reconciled all the paper work. All was fine at the next stock count. To this day we don’t know what happened.

I didn't realize taking spending money out of the company would cause tax issues

Every month I took $2000 out of my business for my own expenses. This was in addition to my salary. I used credit cards and cash and thought this was my company so it was my money.

When we filed our tax returns we did not declare this as income for me. There were only five of us, so no one was really looking. We paid taxes on all the income we declared. Over the next three years the business grew and I started taking $3000 per month. No one said anything.

One day we got a notice that there would be a sales tax audit by the local government officials. I didn’t see any problems with this as we paid all the tax that was due. We passed the audit but I began to think what would happened if they audit our federal returns? I had taken more than $100K over the years. Even if I wanted to declare it, I could not afford to pay the tax and penalties. I was stuck

We needed to get a bridge loan from the bank to finance a new machine in the factory. When they examined our accounts they immediately said there was something wrong. The financial accounts and the bank statements did not balance. I told them I would look into it but knew the difference was the money I had used for my expenses

How did I get into this mess? How do I get out of it?

Even after we did an audit and installed security cameras, we couldn't figure out why stock was missing

Over the past few months we have been running out of stock of certain components. This held up production and cost us a great deal of money. No one seemed to know why this was happening so we had an audit.

What we found was shocking. We were running out of stock because someone was stealing the key components. The invoices showed they were delivered, the internal stock systems said they were on the shelves, but when went to the shelves, they weren’t there. There were only two people in the warehouse. We didn’t know what to do because we couldn’t accuse someone without evidence.

We installed security cameras but didn’t see anything suspicious. We were still missing stock- in fact we lost over $10k of components. We couldn’t figure out what was going on so we finally called the police. They sent someone from the fraud squad who looked at all the records. She said nothing was stolen. The fact was it never arrived at the factory. The invoices were false and one of the warehouse men, who was in on the fraud, recorded them as real and then entered them into the system.

The warehouse man was arrested as was the sales rep at the supplier. It turns out they were cousins and had done this at other companies.

I thought managing my own accounts was good enough until the investors looked at my books

I own my business and did most the accounting myself using Quickbooks. I’ve never had a proper audit but I file and pay my taxes on time. I keep most of my receipts but sometimes when I was paid in cash, I just put the money in my pocket. I wasn’t taking a big salary from the business, so I thought this would be okay.

As sales increased, I needed more money to grow. I went to the bank and they went through my accounts and tax filings. They said that I was not making enough for them to give me a $100k line of credit. I told them about taking money out of the business, but I still had to agree to put my house up for collateral to get the line of credit.

Then my product featured in a national paper and later in a nationwide TV program. Sales immediately increased and three investors approached me. They all wanted to do due diligence. I thought I knew what due diligence meant, but I was shocked by how much information and detail they wanted.

They went through three years of accounts and had five pages of questions; I couldn’t answer most of them. They tried to reconcile our bank statements, accounts, and tax filings and couldn’t do it. They each concluded that we were overstating our margins and profits. I then explained how much cash I was taking out of the business.

Two investors dropped out because it was taking so much time. The remaining one had their own auditors rework the accounts. They offered to make an investment at incredibly unfavorable terms payable in tranches over two years. I had choice but to accept their offer. I wish I had good accounting in place from the start.