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Topic Archives: Fraud

May 14, 2019, 9:00 AM


It’s no secret that California has extensive and stringent wage and hour laws. From overtime, sick pay and meal breaks to rest periods, wage statements, reimbursement of business expenses and more, it’s all covered—generally in excruciating detail.

You already know that if you violate these laws your company can be slapped with fines and lawsuits. But did you realize that you can be held personally liable as well?

It’s not just the company that’s on the hook
Under California Labor Code section 558.1, anyone who is an owner, director, officer or managing agent of an employer and who violates the Labor Code, or causes it to be violated, “may be held liable as the employer for such violation.” This is the case whether the violation was willful or not, whether or not the person was acting under someone else’s direction, etc.

For example, say a front-line supervisor is under pressure to get things done by a certain time each day. To make it happen he has workers delay their lunch hours. But because California law says that workers are entitled to a 30-minute meal break if they work five or more hours in a work day, the supervisor falsifies the timesheets to make it look like these breaks were taken at the legally-mandated time. Eventually, of course, one of those workers files a complaint with the appropriate government department. In a situation like this the business can be fined, and the supervisor (as well as, perhaps, upper management) can also be held personally liable for these violations.

Even bankruptcy won’t get you off the hook
A recent court case, Atempa v. Pedrazzini, is a great reminder of just how expensive these lawsuits can be. In this situation two people sued their former employer, a restaurant. They alleged that the restaurant’s owner, Mr. Pedrazzini, did not pay overtime, minimum and regular wages as per the California Labor Code, and also did not furnish accurate wage statements in a timely fashion.

After these two former employees won their case the employer filed for bankruptcy. The plaintiffs appealed, and Mr. Pedrazzini was held personally liable for the entire judgement: Over $30,000 in civil penalties, plus $300,000 in attorney’s fees.

You must comply with the law
The reality is, the laws are so extensive that even the most conscientious employers can find compliance difficult. That said, I’ve also seen many employers who like to operate in what they consider to be “grey areas.” This is a dangerous way to go, because sooner or later they’re bound to be caught.

Jul 11, 2017, 9:00 AM


It’s a recurring nightmare for many business owners. Something happens, and you suddenly discover that one of your trusted employees has been cheating you. Even worse, the fraudulent activity has been going on for quite some time.

The reality is, fraud can be very hard to detect. Here’s why…

The Fraud: Overpaying for purchases
In this fraud the purchasing agent agrees to noncompetitive pricing, and then gets some type of kickback on every purchase, whether it’s cash, travel, or whatever. Even high-level employees can be on the take, such as a Controller or CFO responsible for professional services contracts.

• Why this is hard to detect: Quite often companies have complete faith in the person doing the purchasing. They do not require that this person gets competitive quotes on major areas of spending, or have somebody review those quotes.

The Fraud: Phantom employees
What typically happens in this type of fraud is that somebody adds fictitious employees to the payroll. For example, a supervisor in the field submits paperwork for someone who doesn’t exist, or for someone who exists but doesn’t actually work for the company. HR has no idea it’s a sham.

• Why this is hard to detect: Most companies will scrutinize time sheets, but will not go out and physically verify that these people were on site during the stated dates and times. This can be especially challenging for companies with labor that fluctuates based on the work load. It can be easy for someone to submit falsified time cards for real people who were not actually employed by the firm at the time.

The Fraud: False overtime claims
This type of fraud generally requires collusion between the employee and the supervisor who approves their time cards. Often the employees are legitimately on the job on the days stated on the time sheet, but are not actually working any overtime. The supervisor agrees to approve bogus overtime in return for a percentage of the extra pay.

• Why this is hard to detect: It is hard to detect a fraud that involves both the employee and the supervisor. To avoid this problem, a good control to put in place is a “labor budget.” Supervisors must keep labor costs within this budget, with additional costs requiring additional approvals.

The Fraud: Embezzlement
What I’ve seen in this area is that someone in accounting opens up a bank account for a fictitious vendor, sets that vendor up in the A/P system, and then cuts checks to them. While banking regulations make this harder than it used to be, it’s still possible. Another common embezzlement scheme is to collude with a vendor who provides bills and receives checks, but does not provide any actual goods or services.

• Why this is hard to detect: First, many companies do not have the necessary controls in place to prevent this type of problem, such as requiring the use of purchase orders, or requiring that multiple people approve new vendors. Second, once checks start regularly going out to a vendor, everyone becomes familiar with it. If a person can get away with the fraud for a few months, it’s easy to keep it going.

Need help getting appropriate checks and balances in place to help you avoid these scenarios? Give me a call. As an experienced CFO, establishing policies, procedures and controls is one of the many services I provide.

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