In the latest issue of The Wright Toolbox:

• Out of the Ashes – Lessons Can Be Learned –read now
• Who is Controlling Your Corporate Pocketbook? – read now

Out of the Ashes – Lessons Can Be Learned

by Michael Stover

I am sure that everyone saw the horrific scenes of the fire engulfing the Notre Dame Cathedral in Paris, France.  Apparently, the Cathedral was in the process of being renovated when the fire broke out.  As I sat watching the video and images, after concern for loss of life, history and artifacts, my mind began to think about who was to blame?  Of course, in France the question of blame will likely play out differently than it would here in the United States as a result of our differing legal systems and laws.  But the question is still relevant to consider here.  Perhaps this tragic event can serve as a wake-up call for us and our businesses.  What lessons can be learned from this tragedy?  What issues should we be thinking about to ensure that we are prepared in the event that the unexpected and unimaginable happens on our projects.  What can the tragedy that befell the venerable Notre Dame Cathedral teach us?

I was involved with a hotel fire case in Washington, D.C. a few years back.  During the construction of a new hotel, slag from a welder fell several stories below and smoldered in some flammable materials before destroying a portion of the new construction by fire later that evening.  As a result, there were investigations, recriminations, finger pointing, delays, damages and, after the insurance company paid the loss, subrogation claims by the insurer.  A whole new, unanticipated layer of administrative time had to be added to the project participants’ bottom lines to deal with the fallout from the fire.

1. The first lesson to be learned is that disaster can strike at any time and it can take many forms. Best practices dictate that from the top of the project (owner/G.C.) to its lowest tier (one person shop with a pickup truck), everyone should be periodically reviewing and studying their insurance policies and coverages to make sure they adequately cover not only the type of work you are performing, but the project in which you are performing  the work.  A one-size-fits-all policy is a non-starter.  The amount of damage that can be caused by your work is not directly proportional to the size of your contract or the amount of work you are performing on the project.  At Notre Dame it was reported that the renovation project was $6 million.  The damage to the building and its contents is so large that costs of repair are difficult to calculate.

Does your policy cover you for damage caused by your subcontractor to your work?  Do you have the proper endorsement to your CGL policy?  Do your policies and coverages match what is required in the contract documents?  If you are supposed to be an additional insured on another’s policy have you been properly added?  Set up a meeting with your insurance broker to go over all the issues.

1. 1. The second lesson is to make sure your contract terms are in order to address such issues. Review your contracts to determine if you are requiring the proper types and amounts of insurance coverages and that you have specified the right endorsements and riders to standard policies.  Work with your insurance broker to drill down on the specific coverage form that works best for you.  Make sure you include a proper subrogation waiver so that the insurance company that pays the loss won’t be able to harass the project participants with subrogation actions to recover its losses.  Make sure your indemnity provisions fully protect you and any upstream obligations you have.  Make sure you require your subcontractors to flow-down the critical provisions to the contracts they have with the lower tiers.  Specify safety protocols, plans, policies and procedures and make sure they are enforced for the protection of everyone.
   2. The third lesson to be learned is make sure you have the proper licenses, permits, and certifications to be performing the work. If the unthinkable happens and it turns out that the license had expired, that there was no permit or that the workers were not certified, liability will be impacted and there may even be criminal liability.
   3. The fourth lesson to be learned is keep your records in order. When disasters strike, inevitably the finger pointing will start.  The last thing you want is for it to be your word against theirs.  Keeping accurate records will help demonstrate the facts with contemporaneous information and will help with your defense.  In addition, detailed and thorough records can also help with any claim for damages.  Photos, videos, daily logs, signed tickets, documented approvals, written confirmations and notices are a must.  Oh, and make sure there is a backup copy of your records off site in case the disaster is a fire like at Notre Dame.

WCS can help with risk assessment and management.  We regularly work with our clients to identify and address these issues before disaster strikes.  Let us put our skills to work to help you.

Who is Controlling Your Corporate Pocketbook?

It happened again, this time in Connecticut. Another greedy employee stole from the company. The unassuming victim was a BMW dealership. The perpetrator was the controller.

Just 50 business days after the employee began working for her employer, she began to take home much more than her annual salary.  It didn’t take her long to learn that there was little managerial oversight for her position. No one was looking over her shoulder to watch her daily moves.  She was trusted.

Over three years, the employee stole $1.1 million from her employer.  She used this money to finance her cosmetic surgery, travel first-class to Jamaica, Australia, Hawaii and Mexico, purchase a $50,000 vehicle, pay for a designer wardrobe, and remodel and landscape her private residence.

A forensic audit showed that the employee stole $904,659 through 65 unauthorized electronic funds transfers from the BMW dealership’s bank account, with the money going into her personal American Express account. She also wrote 28 checks totaling $207,778 to pay her credit card bills, and was responsible for $31,452 in unauthorized reimbursements and credit card expenditures.

The employee was able to get away with it for so long because she always seemed to have the answers.  The President of the BMW dealership said as part of a witness impact statement, “We had to let go of many people and changed several pay plans. But month after month, nothing seemed to change and no one could figure out why. She had an answer for everything but would reassure me that things will be so much better by year-end.” “[she] thrived on making it seem like she was being the hero and pointing out our flaws to improve them, while she was seeing the opportunities of how to steal from us.”

The employee is serving a 30-month prison term followed by 3 years of supervised probation.

Sadly, this was not the employee’s first time embezzling from an employer.  Prosecutors in the case stated that she had a “history of financial improprieties with at least two prior employers.”  She was terminated from both and never prosecuted in either case.  According to a court filing, one of her former employers was a Honda dealership in New York.

Forensic auditors report that in nearly one-third of financial fraud cases, the victim organization lacked the appropriate internal controls to prevent the fraud. Theft could have been prevented if managers had done a sufficient job of reviewing transactions, accounts or processes.

There are also common behavioral indicators exhibited by perpetrators. For example, approximately half live beyond their means while the fraud occurs. Other common red flags include displaying control issues or an unwillingness to share duties and intimidating colleagues. This tends to be the employee who never takes vacation, refuses to delegate, and doesn’t trust anyone else to handle an assignment as well as her.

Any company can be a victim. Avoidance starts by doing a good background check on a candidate who you wish to hire for any accounting or financial position. This includes calling prior employers, and running credit checks and criminal histories. Certain state and local laws dictate when you can run these reports and what advanced authorizations are required. Perhaps information could have been learned about one or both of Vance-Small’s financial improprieties through her prior employers.

There is no better time for a business owner to understand their company’s finances, budgets and to review controls for check writing, bank reconciliations, credit card expenditures, vendor lists, and understand who has access to bank accounts. Consider bringing in an accountant or auditor to teach you what you don’t know. Don’t let pride or a lack of understanding get in the way of your company becoming the next victim.

(This article is printed with permission from The Daily Record.)

To browse past issues, visit The Wright Toolbox page.