Joseph Jones is the CEO of American Men’s Clothing and he has used money from the company for various means including to cover personal bills and purchases. He has also used this money to defraud his former clients out of hundreds of thousands of dollars. Further, he is making restitution payments because of a previous criminal charge. Because he is the CEO, however, no one is double checking and second guessing his actions or logging where the funds are going and what for. Albert, the man who hired Joseph trusted him to run AMC especially while he was away on business trips. He came face to face with serious betrayal when he received a phone call from his banker telling him the line of credit had been exhausted and asking for additional collateral to cover the desperate shortage in cash. This is when Albert reviewed the financial records with the controller and discovered what Joseph had done. A little more digging revealed that not only should Joseph have never made the wire transfer but that he also had a criminal record. A few days before his death, Albert removed Joseph from his will which would have given him 10% ownership of the company.
Several lessons can be learned from this unfortunate case. The first is that one should preset morals and values that one lives by no matter what happens. In this case, if Joseph believed that defrauding his clients, stealing, gambling, and holding on to excessive debt was wrong and went against his core beliefs, he would have never gotten himself into this trouble. Extreme financial pressure that Joseph faced – luxury house with a huge mortgage, expensive material possessions, family members including girlfriends, and his previous criminal conviction for which he was paying restitution – certainly played a role in his approach to money but it is not excuse for his actions. Glusman states “All of these pressures led him to commit fraud.” But his was up to him to use his position wisely and see this opportunity as a second chance not to do the same things.

Second, as the CEO, he was given privileges that he should not have been given. For example, he could authorize the writing of checks and wire transfers as he did at will. In major companies, there is a CFO – chief financial officer – who keeps all things surrounding the company money in line and per the books. He would have been able to see collect all receipts, verify the amounts and what they were for, track deposits and transfers, and approve or disapprove of spending. A CFO is accompanied by several of people who have specific duties. For example, two or three other people are authorized check signers. This creates a three-shield barrier because if all three do not sign, then the check does not go out. This keeps order in the office and at the bank and cuts down on freewheeling spending.

Third, a proper reporting procedure should have been in place. Glusman states “The purpose of these reports is to allow owners the ability to review important financial transactions to ensure that they are in line with established policies and limits.” This is particularly necessary in a growing family-owned business. Many family members feel a sense of free spiritedness and permissiveness to take what they want when they want it without any limits or oversight to their actions. Having an efficient reporting system of what goes in and out will help develop a financial department that is not susceptible to fraud and personal interest.

Third, an outside agency or firm should be able to conduct periodic and objective audits of the company’s financial situation, random transactions, and so forth. Such reports will check duplicate transactions, payments, or return payments. It will verify addresses and phone numbers of those being paid or wired money from each account. It will document times, dates, and other pertinent information about those who have access to the account. This type of detail helps to prevent fraud.

The big prevention mechanism is conducting background checks on each employee. Whether family member or not, if Albert or someone he assigned had conducted a background check on Joseph, they would have seen his criminal record and know what his potentialities and risks are for the company. Before anything happened, any red flags could have been explored, references could have been gathered, and any other pertinent information gained to prevent fraud or other criminal activity.