THE PILFERING PARTNER: Taking advantage of trust and limited oversight, a business partner uses the company as a piggy bank for personal expenses.

Author:Carroll, James
Position:Fraud Findings

Mike Billings of The Building Co. (TBC), a building contractor with $8 million in annual revenue, became concerned about the activities of his 50/50 business partner, Steve Grey. Grey had not prepared certain internal financial documents, including a statement of partner draws for the current year and standard financial statements, which Billings had requested months earlier. Based on his concerns, Billings conducted an initial review by analyzing selected disbursement transactions and identified multiple transactions executed by Grey to benefit his other businesses, including one for $300,000.

Shortly after Billings established TBC, he brought Grey in as an equal partner based on their prior work history and Grey's strong sales background. Although neither partner ever signed a legal partnership operating agreement, Billings acted as president and the only named officer, while Grey held the title of vice president in filed tax documents.

Each partner drew a salary, and an informal agreement between the partners allowed each of them to pass certain agreed-upon personal expenses through TBC as distributions. Based on the agreement, the partner with the lower amount of distributions at year-end would receive a cash distribution to equalize distributions between the partners.

While Billings focused on expanding the business, running projects that he sold, and developing TBC's business strategy, Grey's responsibilities included tracking costs and revenues for his projects, day-to-day general office operations, marketing and advertising, and maintaining the books and records. Although Grey had no accounting or other education related to handling business finances, Billings trusted him fully.

After the initial analysis, Billings contacted counsel and forensic accountants to conduct an investigation. Counsel directed the investigation to ensure privilege was maintained. The forensic accountants obtained forensic images and performed a forensic analysis of all of Grey's computers and business cell phones. In addition, they analyzed all relevant financial documents, including corporate and personal credit card statements related to Grey's activity. The investigation focused on:

* Extracting all accounting and financial data from the accounting software for the period under investigation.

* Obtaining all relevant contracts and supporting documentation.

* Leveraging Billings' knowledge of Grey's other businesses, his familiarity with TBC vendors...

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