US Pharm. 2011;36(3):43-45.
Staying in business these days for independent or small chain pharmacies is difficult enough, and making a profit is even tougher. But when you turn your accounting business over to a trusted advisor, watch out. As will be seen from the case under review this month (Tennessee v. Blaskis),1 giving access to your checking or savings account to someone who is supposed to be paying bills and doing your payroll could spell trouble. Just because you ask someone to do this kind of work to free up your time to do other things, such as engaging in the practice of pharmacy, you should still maintain vigilant oversight and review of texts, documents, bank statements, and anything else that might affect your hard-earned money.
Facts of the Case
A pharmacist owns two fairly large-volume pharmacies located near each other within a county in Tennessee. When he opened the first pharmacy in 1993, he hired the accountant he had used to do his personal income tax returns to be the accountant for the pharmacy. The accountant and the pharmacist considered each other friends, and the business relationship naturally grew out of that friendship. A few years later, the pharmacist opened a second location and continued using his accountant to oversee part of the business operations. All went well between 1993 and 2004.
In 2003, the pharmacist concluded that he could no longer keep up with the paperwork for both pharmacies. He asked the accountant to take over the duty of preparing payroll documents and issuing checks to the 20 or so employees of both stores. The accountant explained the procedure she would use to process the payroll documents. Once weekly, the pharmacist would send the accountant the information necessary to complete the payroll. The accountant would electronically transfer money out of the owner’s checking account in the amount necessary to cover the total payroll. After withdrawing the money from the owner’s account, the accountant placed the funds into her escrow account, and checks were made out to the employees from this escrow account. The accountant used a stamp with her signature embedded to issue the employee checks. The accountant would send the pharmacist statements verifying her activities; unfortunately for the pharmacist, the accounting statements were issued up to 2 months after each payroll cycle.
This new payroll system began in early January 2004. Towards the end of that month, the pharmacist’s bank called him to report that there was an overdraft on his checking account. The pharmacist was “shocked” because he knew that between the two pharmacies, he was doing about $8 million in gross annual sales volume. He immediately called the accountant to find out what was going on. In fact, he called her at least three times within days of being informed that his checking account did not have sufficient funds. The accountant had a different excuse each time to explain the difficulties she was having with cash flow out of the escrow account.
Once he began reviewing his monthly statements from the accountant, the pharmacist noticed that the payroll amounts seemed higher than he recalled when he was doing the payroll himself. The small increase was not sufficient to cause him great worry at the time. However, he also noticed from the statements that there were several small transfers of funds from his account; he thought that some of that money was been used to pay taxes due periodically for his businesses.
During the rest of 2004, the pharmacist visited the accountant’s office at least twice a month. The accountant told him repeatedly that she was the only one handling his account and no one else in her office was permitted to work on his business activities.
By November 2004, the pharmacist became concerned enough with the cash flow problems that he enrolled in online banking. While monitoring his account, he noticed that money was being withdrawn, but that there was no indication where it went. At first, he thought the bank was making errors. He then asked the bank to keep track of where all the withdrawals were going. The bank responded that all of the monies withdrawn from his business checking account went into the accountant’s escrow fund.
Armed with this information, he put a stop order on his account to prevent the accountant from accessing and withdrawing any additional money, and then he went to confront her. According to the pharmacist, the accountant became very nervous and defensive. She told him that she would try to find out what was happening, that she would fix the problems, and that he should not worry because she had insurance to cover losses of this type. The pharmacist found out later that the accountant did not have any insurance policies on her business. She also told the pharmacist that she was the only person in the office who handled his account and that no one else was authorized to perform any other services for his business.
About the same time, the pharmacist demanded return of his files, records, and checks. He told the accountant that she was no longer allowed to do his payroll. The accountant returned the pharmacist’s checks and a computer disk containing the payroll information. She did not, however, return any of the other files or records that the pharmacist requested, despite the fact that he called her nearly every day asking for these documents. He also wrote a letter and personally handed it to the accountant, asking for return of his records. These documents were never returned to the pharmacist until after the accountant declared bankruptcy and the records were retrieved by a bankruptcy trustee.
Civil Lawsuit
The pharmacist took the documentation he had been given to an expert witness–accountant who concluded that $415,000 was inexplicably missing from the pharmacy’s business account. The accountant handling the payroll had never been authorized to make these extra withdrawals. Although the pharmacist knew that his accountant had declared bankruptcy in 2005, he sued her anyway, trying to recover his missing money. Unfortunately for the pharmacist, this lawsuit was an exercise in futility. He would never recover the lost funds.
During the course of this lawsuit, it was discovered that the accountant made several withdrawals, some on the same day, without any explanation. For example, on January 21, 2004, there were five withdrawals, two of which went to pay taxes, with the other three going into the accountant’s escrow account. Between January and November 2004, the accountant had withdrawn $797,825 from one pharmacy whose payroll for that period should have been $467,877. During this same period, the payroll for the second pharmacy should have been $141,489, but the accountant had withdrawn $233,453. In the end, there was a total of $414,989 missing and unaccounted for in the pharmacist’s accounts.
The expert witness for the pharmacist indicated that he did not have any access to the accountant’s escrow records for the period under review, but that it was common for an accounting firm to use a single escrow account for many clients. This witness also testified that the accountant’s scheme for removing money from the pharmacy’s accounts to her escrow account was not elaborate. No one testified as to where the missing money went or why and when that money was taken out of the escrow account.
An employee for the accountant who had started working in 2004 testified that only the accountant and herself had authority to transfer money into the escrow account. According to this witness, there was only one password for getting into the escrow account and that the accountant kept it in her private office. In January 2004, there were only six or seven other people working at the accounting firm at the time, and only the accountant was authorized to work on the pharmacist’s accounts. The accountant did not spend much time in the office during the time germane to this lawsuit because she was sick and going through a tough divorce. The witness testified that the pharmacist came into the shop frequently, demanding return of his files, and that the accountant was upset by these confrontations. She also testified that soon thereafter all of the records relating to the pharmacist’s business, including payables, receipts, and payroll, disappeared from the office computers. There was no technical reason, such as a computer crash, to explain the disappearance of the documents.
Another woman hired as an intern began working for the accountant in 2004. She offered to help the accountant with the pharmacist’s records, but the accountant said the pharmacist was very particular about who handled his accounts and that she was the only person authorized to do so. In December 2004, the intern and the accountant had a falling out. The accountant accused the intern of taking the pharmacist’s money.
Both of these employees were interviewed and investigated by the Tennessee Bureau of Investigations, which never found evidence implicating either of them. A third employee, who was the senior accountant in the office, corroborated the testimony that the accountant was rarely in the office during most of 2004 and that the accountant was the only one authorized to work on the pharmacist’s accounts. After the pharmacist confronted the accountant and asked for the return of his records, this third employee attempted to locate them for him. She found only one bank statement, which showed there were seven withdrawals in one month. She recalled thinking this was strange since payroll occurred weekly, meaning that there should have been only four withdrawals for that month. The employee could not explain why there were no other hard copy or computer records of the pharmacist’s business account or what happened to the money in the accountant’s escrow account.
Criminal Charges
In November 2006, the accountant was indicted by a state grand jury for theft. After a jury trial, she was found guilty and sentenced to 10 years of incarceration. In her appeal, she claimed that she was denied a speedy trial as guaranteed by the Tennessee and U.S. Constitutions. As noted, she was indicted in November 2006 but was not informed of the charges against her until April 2008—a 17-month delay.
The prosecutor claimed that he did not serve the accountant with notice of these charges when they were first handed down because she was already incarcerated in a federal prison in West Virginia for an unrelated crime involving money laundering for a drug cartel.2 The prosecutor consulted with the federal authorities in West Virginia and learned that the accountant was participating in a treatment program and was expected to be released in 12 to 18 months. If the prosecutor notified the appellant of the pending charges in Tennessee, the West Virginia federal prison would remove her from the treatment program and she would not be eligible for early parole. After she was released from prison, she was placed in a supervisory program run by the federal prison system. The prosecutor determined that if he served her with notice of the pending Tennessee charges, she would be sent back to prison in West Virginia and the state of Tennessee could not begin criminal proceedings against her until 2010. He also learned that she was to be released from that program on April 4, 2008. On that day, the prosecutor gave her notice of the charges pending against her in Tennessee.
After analyzing the right to a speedy trial, the court concluded that the delay between the time the accountant was indicted and the time she was served with the Tennessee criminal charges was not unreasonable and did not prejudice her ability to defend herself. The court reasoned that she knew in 2004 all of the facts needed to defend herself.
The accountant testified in her motion to dismiss the Tennessee criminal charges that after she spoke with the pharmacist’s expert witness–accountant about problems with her account in November 2004, she looked into the matter and found duplicate entries. She claimed that she performed an audit on the pharmacist’s accounts and generated audit papers and activity logs that showed who was logging into her office computers at a certain time and whether it was occurring in the office or remotely. Her lawyer also hired a private investigator whose search showed that the intern was the culprit and that the intern had operated under as least seven different aliases. The accountant also claimed that after her 2005 bankruptcy declaration, the bankruptcy trustee took control of all her assets and everything in her office without any warning. After her bankruptcy was discharged in January 2008, the trustee destroyed all of her records in February 2008. The court found that these facts did not prejudice her right to a fair trial. Accordingly, her conviction and sentence were affirmed.
Analysis
While the pharmacist might have taken a measure of satisfaction that his accountant would spend another 10 years in a Tennessee prison, in addition to the 3 years she spent in federal incarceration, he was still missing $415,000 out of pocket that will never be recovered. That horse got out of the barn before the doors were closed, and there is no hope of ever finding it or bringing it back home. If you have given authority to anyone (e.g., a trusted friend, a longtime associate, or an accountant), be sure to pay attention on a regular basis to what is going into and out of the account. It’s a bit like the practice of pharmacy: You can delegate tasks, acts, and functions to a designee, but you can never delegate responsibility or accountability. That same principle applies to your personal income, your investments, and your business dealings. It’s your money—take care of it.
REFERENCES
1. Tennessee v. Blaskis, Slip Op No. M2009-01154-CCA-R3-CD (December 8, 2010), 2010 Tenn Crim App Lexis 1033. www.tsc.state.tn.us/OPINIONS/
2. Several police officers arrested in operation tarnished shield. The Chattanoogan. August 16, 2005. www.chattanoogan.com/articles/
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