Chapter Thirty
Bad to the Bone
Summer had cooled its way into fall. The trees were bursting with a rainbow of color. That was something that amazed me every year. The fall trees were pretty in Ohio when I was growing up, but nothing like this. This was like God had spilled all his Crayolas into the sun and they melted down over the North Carolina foliage. What a great place to live.
Business remained strong. The plant was running on all cylinders after the rebuild. Our sales were at record highs. Profits weren’t as good as they might have been. Jack said it was just a timing issue and things would “hockey stick” their way up once all of our rebuild and start-up costs were behind us. That left us with a smile on our collective “Circular” faces.
I was watching the squirrels frolic on the big oak branches that were grazing the outside of my window. I was in deep thought weighing the wisdom of having the branches trimmed before they grew into our offices versus the social impact of displacing these innocent cute rodents. Yes, it was a slow day. Maybe Jack and I could sneak off for a quick nine holes. Guess who came through my door at that very moment? If you guessed Megan Fox, I complement you for trying to brighten my day. But, alas, it was simply Jack. Not that there was anything wrong with a visit from Jack. Au contraire, mon frère. It is mainly through Jack’s efforts that I had a door on my office (or an office at all). And my trashcan was empty.
“Hey, big guy. I was just thinking maybe we could dash out to the club later and I could give you another quick lesson in how a real man plays golf.”
Jack took a seat without responding. Odd. He placed the envelope he was carrying on my desk. Ah, it must be time for him to settle up. Jack always seemed to get a bit grumpy when he was parting with money, especially his own. Not that he was cheap, but I don’t remember him picking up many bar tabs. We had advanced him twenty-five grand on his salary to get settled in. He was a few weeks late in paying it back, but I’m sure it was more of remembering to do it than doing it. Jack was making six figures and Chuck was contemplating giving him yet another raise.
“Hey, Studman, glad things have settled down and we can bring your account back to even. Heck, with the way you’ve been performing, you’ll be running this place in a few years and I’ll be asking you for a loan so I can buy your used and abused ‘Vette. However, I might have to have the backseat professionally sanitized. Maybe I shouldn’t say things like that since we might be brother-in-laws someday.”
My second indication that all was not right in Mudville was the lack of the usual sly grin on Jack’s face.
“Yeah, I have a check for you. But, before that, I’m afraid I have some news that you are not going to want to hear. I hate to have to be the one to bring this to you, but you need to know.”
Ok, that was my third indication.
“There is a very clever and sneaky thief ripping off the company.”
Uh oh. I think joke time had just left the building.
“What? Did some staplers go missing?” Ok, joke time had not completely left the building.
“Mick, for once, I am serious. We are missing about seven hundred plus large. I think I know who took it and how they got it.”
“Jesus.”
“No, wasn’t him. Sorry, I did say this was serious.”
“You mean as in seven hundred thousand?”
“Yes, Mick, and before you ask, that is American dollars.”
The breath went out of me as I paled. “Ok. Start from the beginning.”
“As you know, after Elwood left, the accounts were a bit squirrely. He had transferred money between accruals, deferred accounts, fixed and variable costs, receivables and payables etc. all in an attempt to make it look like his cost reducing plans were working.”
“Yup. He was a bit misguided. He needed someone’s praise and approval to make him feel wanted. He thought if he got that from his uncle, he would be somebody. I knew he unwittingly blew up the plant, but he didn’t actually steal money, did he?”
“The more I unwound all the accounts and got things into balance, the more I suspected he did.”
“But he didn’t, did he?”
“No.”
“Then who? What?”
“You asked me to start from the beginning, so I will. Since time began, there has been a scam inside companies known as the salami scam or penny slicing. Basically, you take transactions and round the pennies down to the nearest dollar. You pocket the round downs and only report your financials at a higher dollar level. With me so far?”
“Yeah, we always talk in thousands of dollars, never pennies.”
“Right. And until recently, you guys were on a paper accounting system.”
“Yeah, we just came into the modern age accounting-wise a few years ago.”
“Well, the salami slicing here started about ten years ago with your paper system then got programmed into your automated system.”
“That can’t be right. And how can a few pennies add up to hundreds of thousands of dollars?”
“In this size company, it can’t. But it did add up to about seventy-five grand over the years I was able to trace.”
“Ok, say I buy this. How about all the rest you think is missing?”
“Mick, I don’t blame you if you don’t believe me. I didn’t believe it myself. So I hired a firm to look into it.”
“Without my knowledge or Chuck’s knowledge?”
“I told Chuck what I was doing. In fact, he approved it. We decided to keep it contained as much as possible in case I was mistaken. We didn’t want any aspirations cast in the wrong direction. We used the same firm that you guys hired to do background checks on new employees.”
“After Elwood, Chuck wanted to have new staff hires checked out. If I remember correctly, he hired that company with the hot looking President. We’ve only used them once. And that was to check you out.”
“Yeah, I think Chuck might have been thinking with his eyes not his head that day. There are much bigger firms that will provide those services much cheaper. However, they do have a well respected forensic accountant on staff. So I asked them to look into things a bit deeper.”
“So, what did they find?”
“It’s all detailed in here.”
Jack picked up the envelope and handed it to me. I shook out a report that looked very official and very ominous. I didn’t notice that there wasn’t a check from Jack in there. In fact, I had forgotten all about it.
“I noticed something odd the first few days I was here. Excluding Elwood’s shenanigans, other things seemed a bit off. There were lots of write-offs to accounts that got cashed out each month. But I couldn’t see where the cash was going. So I came in early most days and stayed late most nights to try to figure it out.”
Jack, the investigative hero. I think a younger Robert Redford (maybe Brad Pitt) would play him in the movie version.
“Mick, I can see a bit of a twinkle in your eye. Yeah, I did feel a bit like Sherlock ‘Freaking’ Holmes.”
“I always wanted to be “Johnny ‘Freaking’ Holmes.”
That helped break the tension and let us talk more freely to each other.
“Ok, I’m stunned. Questions. Still who? Why? How did it balloon so high? And no, that is not a classic rock song.”
“Let me continue. I gave the forensic bulldog the scent of a chicken bone and he came back with a brontosaurus.”
“Huh?”
“Well, he confirmed the salami scam and came back with something much larger. It seems the accounts that the shavings were shuffled into recently got some real money pouring into them. “
“How?”
“It’s the plant rebuild. I know you guys spent long hours estimating the rebuild costs. Any variance over ten percent by operating unit would get your attention and trigger a review.”
“Yup. That was our internal control system during constructi
on.”
“What would you say if I told you all the construction costs were over by two to seven percent?”
“I would say we were pretty good estimators.”
“Pat yourself on the back and go home happy. Just what a nefarious mind will prey on.”
“Sounds like Lex Luther.”
“Yeah, and luckily this forensic guy is Superman. By flagging these salami write-off accounts he was able to spot recent activity coming from plant rebuild overages as it funneled through accelerated depreciation.”
“Huh?”
“Without getting too technical, companies capitalize costs of assets and write them off over the useful life of the assets against earnings.”
“Yeah, I remember a little Accounting One oh One.”
“Well, for tax purposes, you can accelerate the write off the first few years. The thief set up a fake vendor (himself), paid the fake vendor and hid the costs in accelerated depreciation write-offs. That coupled with the other non-capital rebuild costs and a good year of earnings for the company hid the theft of these big dollars in the noise. Also, it happened monthly, so it was not easily spotted by me or anyone else in the otherwise strong results we kept having.”
“Ok, I’m officially dazed and confused. So who is this criminal mastermind? If I had to guess, I would say either Kitter or Fallan.”
“That’s why we needed absolute proof and could not rely on guesswork. God, this is the hard part. The easy way would be to let you read the conclusions in the forensic report. But, that would not be right. Who was the financial accountant when you started? Who ran the paper system for many years? Who helped program the new system? Who has access to the accounts? Who gave blurry financial updates for years? Who do you trust like a brother?”
“Oh God, no.”
“I’m sorry. I guess Earl is not only bigger but also smarter than the average bear.”
MBA - Moron$ Ba$ and A$ PG Version Page 31
