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Fly the Flag

May 21, 2015

Monday is Memorial Day, where we remember and honor those that fought for our country and made the ultimate sacrifice.  In their memory, we should proudly fly the American Flag.

If you do not follow this practice, 3’ x 5’ flags can be purchased in many stores such as Target, Staples and Home Depot.  An easy way to display the flag is to screw two cup hooks into the top of the outside of your garage door.  You can then display the flag vertically and remove the flag as desired.

I suggest flying the flag on the three days of the Memorial Day weekend.  Also, on June 14 – Flag Day and, again, on July 4th. You can search the Internet for other days it is appropriate to fly the flag.

Remember those that made the greatest sacrifice for our freedom.  Fly the flag – Proudly!

Anatomy of a Fraud

May 19, 2015

In this fraud, ING, an extremely large and well-known financial services company had approximately $8.5 million stolen from it by a single employee over a period of a little more than four years.  Here’s how it worked:

  • Nathan (the fraudster) was an accounting manager in ING’s reinsurance division with three people working under him. Nathan reported to the assistant controller and the controller.
  • Nathan, another coworker and one of his subordinates had the ability to request checks in amounts up to $250,000.
  • Nathan and the coworker were also given the ability to approve checks.
  • Each of the members of Nathan’s group as well as the coworker all knew each other’s password.
  • Nathan was having trouble making ends meet on his $80,000 annual salary and had run up about $88,000 in credit card debt.
  • The initial fraud started with Nathan signing on as his coworker and requesting an $1,800 check to a company called Universal – which happened to be both the name of his credit card company and a vendor ING conducted substantial business with.  After requesting the check he logged on as himself and approved and mailed the check to his credit card company.  After the success of the first theft Nathan began requesting and approving checks until, over time, his $88,000 credit card debt was paid off.
  • One of his early checks for $4,500 never cleared his credit card statement.  He had forgotten to write his account number on the check before mailing it and the credit card company did not know where to apply the payment.  It returned the check to the corporate office which re-routed it to the original requester!
  • Later Nathan expanded his fraud by creating a fictitious company with a name similar to another vendor ING had substantial business with.  He would log on as one of his subordinates in the evening after the subordinate had left work and when the subordinate was off the following day.  He would then log on as himself and approve the check.  After picking the check up the next day, (when the subordinate was off) he deposited it into the bank account of the fictitious company he had created.  This continued for several years resulting in the loss of $8.5 million.
  • A check request requires the requester to indicate where the check was to be posted.  Nathan always chose accounts that had significant reconciliation activity such as insurance claims or commissions.
  • Another account that Nathan used to hide his payments was the foreign currency exchange gain/loss account.  He was the only one who reconciled this account for seven straight years and therefore was able to fudge exchange rates a small amount to mask the posting of his checks.
  • The fraud was uncovered when Nathan’s ex-wife had lunch one day with one of his coworkers and the ex-wife talked about not believing his stories about gambling winnings.  The coworker became suspicious and began investigating and uncovered the fraud.

As frauds go, this was nothing novel.  The fraudster was enabled by poorly designed and poorly implemented internal controls. The following all played a significant factor in the fraudster being able to perpetrate and hide the fraud for a considerable length of time:

  • Lack of segregation of duties – Those requesting checks should not be allowed to approve checks.
  • Insecure password policies.  Employees should understand the importance of both changing passwords often and keeping them private.  Public passwords are virtually worthless.
  • Insufficient oversight and lack of rotation of duties.  Having the same employee perform the same reconciliation operation for several years without oversight or rotation of duties enables that person to fudge the reconciliation at will.
  • Inadequate check mailing policies. Signed checks should not be returned to the check requester for mailing.  Furthermore, checks that are returned by the recipient should not be sent to the original parties involved in their request and authorization for investigation.
  • Inadequate procedures on how a new vendor can be added into the system.

There are other preventive measures but the above sequence indicates many steps that could have been taken that either would have avoided, minimized or uncovered the fraud sooner.  As it was, none of ING’s procedures caught the fraud – it was through an unrelated lunch discussion.

This blog was called to my attention and summarized by two of our quality control partners – Brian Gibney and Dave Dacey and was based on an article by Mark J. Nigrini and Nathan J. Mueller in the August 2014 Journal of Accountancy titled “Lessons from an $8 million fraud.”  The entire article can be accessed at

What Things Are Worth

May 14, 2015

Much value is illusory, but some isn’t… or is it?  For instance what is an office building worth?  Well, it would depend on where it is located, whether it is fully rented or vacant and the amount of the rents, quality of the tenants, length of leases, whether building is well maintained or has perpetual repairs, its age, zoning and a myriad other factors.

I remember one time when Donald Trump was part of a group that purchased the Empire State Building for about $40 million and he was bragging about that.  Well, at that same moment, the people that had a 90+ year lease on that building were spending $65 million just to replace the windows.  The property owners, it seems, were not able to derive any economic benefits of ownership (except possibly the 4% annual return on their investment) while the people with the lease received all the income flowing from managing the property.

So, what is something’s value?  The correct answer is “it depends.”  Two days ago I asked myself that same question while I was reading the front page of The Wall Street Journal.  Articles were about home prices starting to heat up, Samsung questioning its game plan, Tom Brady being suspended, the U.S. Air-Traffic system needing rebuilding, Edamame and goat cheese concessions at movie theatres, the differences in over the counter pain relievers, the death toll rising due to a faulty switch in some GM cars, Shell becoming able to drill for oil in the Arctic Ocean, ranchers expanding cattle herds, Morgan Stanley selling its oil-trading business, American Idol being cancelled, the share of Americans that are religiously unaffiliated rose to 22.8% [not about 23% or just over 22%, but 22.8%] and a Picasso selling for $179.4 million,

Each of these affects value.  Now, I know that houses of worship aren’t usually bought and sold, but affiliation affects cash flow which can determine whether a particular church remains open.  The thing that got me started on this subject is the Picasso.  I remember the big news in 1961 when the Metropolitan Museum of Art purchased Rembrandt’s Aristotle Contemplating the Bust of Homer for $2.3 million.  This was big news even making the front page of the New York Times.  For months [possibly years] afterwards, there were long lines of people wanting a glimpse at that painting (which most of them probably never heard of before that purchase) signaled to them the painting’s “extraordinary value.”  On some level, the “value” of the Met was likely increased because that purchase had to have led to increased contributions and memberships.

Mostly everything everyone does affects value.  In some situations, it doesn’t matter… but, typically it does.  Good traders are alert to opportunities with unnoticed or unappreciated trends indicating stealth value.  For them, it is a way to wealth and the value they see doesn’t “just depend.”  Oh, and value can go both ways.  Besides going up, it also can decline; and sometimes loss of customer base, parishioners, viewers, market share or damage to a reputation is terminal.  In those cases, it doesn’t just depend!

Setting an Agenda

May 12, 2015

Recently, I was approached with questions from a board member of a nonprofit organization in trouble about changes they will be making in their systems and procedures. Looking for suggestions, I told her they were off base and needed to get their priorities straight. At the same time, I was shown a retreat agenda from another nonprofit organization… Also off base.

Both organizations have admirable functions, a concerned and involved Board and a desire to expand the purposes of their organizations. Unfortunately, they also miss the point.

The first organization that was in trouble has a declining member and revenue base, yet they were concerned about something that does not address their main issue – staying alive and remaining relevant. I told them they need to focus on improving member retention and getting new members. Not coming up with a plan for this will be fatal. The absence of having good systems is an annoyance, maybe costly and perhaps stupid, but not terminal.

The agenda I saw was for an offsite 2½ day retreat. The impressive agenda had no time allotted for ways to engage or to improve services to members. I might be missing something but isn’t an organization’s raison d’être about the “customers” who, in this case, are the members. This organization is extremely successful, so maybe the Board chair doesn’t think member services need any attention. For me, it’s always about the customers. They also had a half an hour allocated for their strategic plan update. I don’t know what their plan is, and it might include something dealing with members, but I know there is a dearth of younger people on their Board. Perhaps some time should be devoted to this.

Part of the purpose of meetings and retreats is to engage Board members, promote camaraderie and to have fun. However, the main purpose should be to find ways to make the organization better, more important to members or customers, grow memberships and to be more profitable.

As Stephen Covey said: Make the Main Thing, the Main Thing!

Work Hard and Retire When You Are Able

May 7, 2015

About 290 years ago, a 17-year-old boy ran away from home with barely enough money to live on.  He got a job as a printer and worked very hard and became pretty good at it.

About 6 years later, after a series of mishaps, he decided to go into his own printing business.  At first, he did everything himself – wrote the articles, set the type, prepared the paper, mixed the ink and worked the press.  One time, he had everything ready to print and he dropped the type that he set and had to do everything over.  Not only was he very upset, but he had to work through the night doing it.  Neighbors noticed the candle lights on when they went to sleep and noticed the lights on when they woke up. The neighbors didn’t know that everything was being redone and they thought how hard a worker the printer was so they started giving him their printing business.  He learned from this that it was very important to work hard but just as important to make sure people knew it.  He became a good “promoter” and also busied himself with many volunteer activities to network and meet people who would become his customers.

His business grew so much that he was able to hire people to assist him and even invested money with printers in a dozen other places to form partnerships with them.  He also leveraged his conventional printing business to writing and publishing a newspaper and books.  One of his books was an annual almanac that became the largest selling book in the American Colonies for 25 years!

His investments and publishing made him so rich that he was able to retire from the printing business when he was just 42 years old.

This man died 42 years later as one of the richest men in America.  However, he isn’t remembered for being wealthy or for the businesses he started.  He is remembered for what he did after he retired and got free time to devote to non-business activities.

One of those things was to help create the United States of America by signing the Declaration of Independence and the United States Constitution.  His picture appears today on the front of the $100.00 bill and the back of the $2.00 bill along with Thomas Jefferson and John Adams.  His name was Benjamin Franklin.  By the way, his Poor Richard’s Almanac is still being reprinted today.

Money Will Work For Me

May 5, 2015

About 150 years ago, there was a 10-year-old boy named John whose father was a fast-talking, traveling “medicine man” who spent very little time at home.  His father arranged for John to do odd jobs for neighbors to earn some money.  John never spent anything and kept his money in a box under his bed but did give 10% of whatever he made to his church.

When he was close to age 12 his father found the box and had John “lend” the money to a friend of his.  John was repaid a year later and was also paid an interest amount which equaled what John made in two months from his odd jobs.  He was surprised that he was repaid, but even more surprised that he received interest that was payment for the use of the money.  He found out that money earns money, and at that point, he resolved that when he grew up “money will work for me.”  He learned about all different ways to have money work for him and then learned even more about it.

He became the richest man in the world.  Some of the companies he founded were Exxon, Mobil, Chevron, Amoco, Conoco and Pennzoil.  He also founded one of the largest charitable foundations in the world.  His full name was John Davidson Rockefeller.

My Address to Graduates

April 30, 2015

I am not scheduled to speak this year at any graduations, but many others will be. Many young eager ears will hear words of wisdom designed to motivate them into going forth and doing good. What would you tell them?

Following is what I would tell them.

You were given two chances, so far, to create the masterpiece of your life. When you entered college you were given a blank canvas and told you could sketch the foundation for any future you want for yourself. You now have the second opportunity as graduates.

My young artists, I am giving you two points of advice. 1) Decide what you really like and figure out how you can get a job doing it or leading you toward that. 2) Only accept a position that coincides with what you came up with in 1). Do not feel constricted by your education and major area of study if that is not the way you feel you really want to go. You have an opportunity to redraw the canvas, using what you learned and insights gathered to set out on a different path – one of your choosing.

Too many graduating seniors accept either the first job offered, the one with the highest salary or bonus, the job with the most prestigious company, where many of their friends or would be friends are going, or at a place that they think they can use as a stepping stone planning to leave within a couple of years to go where they “really want to work.” Not the way to go. This takes your future out of your hands.

The reality for many people is that their first job determines their business or professional future. There are many reasons for this but that really doesn’t matter – it is the way it is. Just ask anyone you admire that is over age 50 about how their first job created their future and if they could, would they do it again or what they would do differently.

So, go forth, and conquer the world if you must, just make sure it is what you really want.


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