Should You Trust a Consultant? How To Protect Yourself and Your Business

[00:00:10.11] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltri Group and a financial strategist working with companies to manage their money more effectively. Now on to the And Dan slow it hit the damn button.

[00:00:48.15] - Dan Paulson

He's sitting there listening to Alice talk. Thank you, Alice. You got cut off at the end there, but we're still happy to have you on board. Rich, how are you doing?

[00:00:56.19] - Rich Veltre

I'm doing okay. How are you, Dan?

[00:00:58.20] - Dan Paulson

Another day, another Another dollar, as they say.

[00:01:02.08] - Rich Veltre

There we go.

[00:01:03.02] - Dan Paulson

Hey, so we've been hosting some focus groups around XCXO, and we've had some interesting discussions there. The good news is it's consistent, and even better, that it sounds like we're going down the right path with all this stuff. But there was an interesting challenge, I will say, that popped up. And let's see if you agree with this. This is a high trust business, when you bring in somebody from the outside and you are basically putting your baby in their hands, because most of these business owners, you started the company, you grew the company. You know there are some challenges, but now you are basically opening yourself up to a strange person or entity to help you solve some of these problems. And what came up in the focus group, if I remember right, was that really, almost everyone's probably been burned in some way, shape, or form with somebody. And it can be a little bit scary when you are, again, bringing somebody new in that has not worked with you for several years. And you don't have that built up trust to deal with. And I thought it'd be good for us to just talk about that.

[00:02:19.15] - Dan Paulson

And we can share some of our stories that we've experienced or that we've seen. I know we're going to have one of our previous guests back on. Matt Goosy had a situation that he shared with me after our last interview. I said, it would really be good if you share that experience, because I do believe that we should be doing our part to educate people on what to look for and how to protect themselves, whether they hire somebody else or hire us. You're dealing with money, more so than I am. And we should really make sure that we've got checks and balances in place so that whoever brings us in feels comfortable that, A, we're doing the right for them, but that they know what's happening, and that they can be assured that the money is staying in their bank account and not ending up in somebody else's. What's your thoughts on that?

[00:03:10.09] - Rich Veltre

Well, I think it's a very, very big, valid point. Look, no one knows someone's business better than the owner, founder, person who's running it. They know it the best. And if someone hands I'm showing you something, specifically, I'm leaning towards the financial side because that's what I know, right? If I'm doing work for somebody, and I hand them a financial report, and that person just puts it in a desk, I'd be worried, because that means that person never looked at it. That means that as much as they know the business, they have a gut feel for how the business is doing, they didn't verify it with the numbers I just handed them. So my The first push is for the fact that if you're getting reports from the person that you're hiring, or you're trying to build trust with someone, with the person that is giving you that report, look at the report. See if it makes some degree It makes sense, especially if you know what you hired that person to do. Okay? Does the report show you that they're doing what you asked them to do? Does the report show you that the company is doing what your gut tells you is Is it matching what your gut is telling you?

[00:04:34.21] - Rich Veltre

And if it doesn't ask questions, immediately ask questions. Don't wait. Don't keep it in the drawer. Don't say, well, George is a good guy, and I don't want to talk to him. I don't want to say it makes him upset. No, you're the business owner. So I think there's a big piece of this that really comes down to, do you know what you asked for? And do you know what they're telling you is actually happening from that? And is there anything in there that causes you stress or some degree of, I have to ask more questions because this doesn't make any sense?

[00:05:07.01] - Dan Paulson

Yeah, it's... I don't know about you. I'm sure you've actually probably seen more of this than I have. There's at least, I can think of two or three clients I've had that have dealt with embezelment. One was a client I was already working with for a number of years, and there were numerous changes that were happening at rapid fire pace. Anyway, he had an employee that was in a position where she was managing checks coming in and cash going out. And as it turns out, she was able to get one of the business checks converted to personal name, and was taking that check and then going to the bank and cashing it in. Now it was in the business owner's name, but it had taken off all the business telltale signs on it, so that you knew it was directed towards a business versus an individual. And she got away with that for a number of, probably better than a year, before finally a banker noticed that a woman was coming in cashing a man's check every time around the same time of the day, around the same time of the week. And then when we went back and tracked on it, well, she had actually been doing this before this owner even owned the business.

[00:06:28.10] - Dan Paulson

So he bought the business from somebody else, and she had started way back when. But she was taken at the time like $10 or $20, maybe a week. And by the time we caught her, we were looking through the financials, because that was one of the requirements I had is know your financials, know your numbers. And we were noticing discrepancy. Well, by the time everything settled out, she was taking about $30,000 to $60,000 a month. So If this had continued on, eventually it would have reached a point where the business owner would have been significantly hurt by what had happened, and couldn't even put them out of business. So these are things you have to watch for. And I think that's why both you and I are so stressed on making sure that our clients know their numbers. They read their numbers. They understand at least the basics of what's happening. But from your perspective, since you are the numbers guy, and since that's where most of the issues tend to happen. What are the specific things that business owners should be looking at in their P&Ls, balance sheets? Where would somebody most likely try to hide something if they were going to try to How do you get away with taking money?

[00:07:47.05] - Rich Veltre

Yeah, I would focus on, if you have a CPA, if you have an accountant that's working with you, ask them about your internal controls. If you're audited, you probably have an internal control report because your auditor has probably prepared something that said, here's your internal control weaknesses, if you have any. And the internal controls, nine times out of 10, if you bring an accountant, and the first thing they tell you is segregate duties. So What you just described, where you had one person handling money in and money out, that's a risk. That immediately should be a risk, that you have a limitation in the fact that you don't have a lot of people, so you can't really segregate and you're using the same person to do money in and money out. The mitigating factor, the way you would actually oversee that and beat that, is by some degree of oversight. There should be excessive oversight over that person. And if they got away with it for a while, there wasn't enough oversight on that person. So by oversight, I would tell you, the first thing that I would look at is, who's doing your bank rec?

[00:08:58.18] - Rich Veltre

Who's actually reconciling your books against what the bank says actually happened in your account. Look at the written checks. If you're signing them, you should know that if there's anything in that list of checks that went out, if they don't match what you actually would have expected to see go out or that you recall that you signed, then there's a discrepancy right there. If there are strange adjustments or cash checks or something else, if you can see it on the bank deck, that's That's not really the first place I would look. Other than that, I would take a look at just a general financial statement. How's the business doing? If there's anything in there that stands out, question it. Ask what you see that doesn't make a whole lot of sense to you. Make someone explain it to you. And if they can't, keep going.

[00:09:48.16] - Dan Paulson

Keep asking.

[00:09:50.02] - Rich Veltre

It's not that you're out to get anybody. It's professional skepticism. It's I don't understand it, so please make me understand it before I sign off that everything's okay.

[00:10:01.17] - Dan Paulson

Yeah, I would even, in most cases with the businesses we're talking about, they're probably small enough that they have a limited number of vendors. We're not dealing with a Ford or GM or a Boeing or something like that, where they might have hundreds, if not thousands of vendors providing different components to build their equipment. In most cases, when I look at a company, even of 20, $30 million, they might only have 10, 20 vendors that they're picking from for sourcing parts or whatnot. So make sure you recognize the names. And I would say that's another way you can do an internal audit is go through the list of vendors that you have checks going out to and have people complain to you, well, what company is this? Where is that? When do we start working with this business? What exactly are they doing for us? Any time you put an eyeball on it, it requires somebody to answer a question and also helps mitigate They get the chance that they're going to try and slip something through. Because if you're not looking at, as you point out, if it just goes on a shelf or just goes in a drawer, then they can get away with stuff.

[00:11:11.19] - Dan Paulson

They can add a new vendor. And that vendor probably starts out taking 50 to 100 bucks a week, and then it's 200, then it's 500, then it's a thousand. And before you know it, you're in the hundreds of thousands lost. And there's been several stories in the news, everything from not-for-profits to for profit businesses that have lost hundreds of thousands, if not millions of dollars over the course of years, because they put somebody in place and trusted them to do a job, and then never did any follow up or follow through to make sure that what they were doing was accurate. How often would you actually ask, maybe ask a client to actually do an audit? Because it's more common in the not-for-profit world. A lot of times, I think actually with 501(C)(3), you are required to do an audit every year or every I think it's every other year. Might depend on the state. But most businesses, unless they get fairly large, I don't think are required to do an audit of any sort. So would you actually recommend a company do that Not necessarily. Okay.

[00:12:19.20] - Rich Veltre

Nine times out of 10, the audit requirement, like you said, you get a great example. 501(c)(3) requires that you have an audit because you're taking money from the public. That is usually the push for why there's an audit. New Jersey, the state basically says, if you're over a certain dollar amount, audit's required, and you have to actually provide a copy of the audit report to the state. So it goes along with your 501(C)(3) status, and it goes along with your state status. Otherwise, a for-profit company usually runs to an audit requirement because they borrow money, and the bank would require it, or the investor would require it if they took on ownership.

[00:13:08.25] - Dan Paulson

Is this publicly traded? Is that a requirement, too, as part of being a-Publicly traded is definitely required.

[00:13:14.16] - Rich Veltre

But on a privately held, if they go to a bank and the bank gives them a certain dollar amount, bank nine times out of 10 is going to say, we want an audit. I think there's a dollar threshold. I mean, if you're borrowing 50,000 dollars from the bank, I don't think they're going to say spend.

[00:13:29.25] - Dan Paulson

They're not going to worry about that? It's on audit. If you're buying them in five million, they might want to have a- Borrowing in the millions, I can guarantee you you're going to have an audit requirement.

[00:13:39.08] - Rich Veltre

So then on top of that, then again, investors may say, we want an audit because they I don't basically make somebody accountable for the fact that did you actually do what you said you were going to do? I would say, though, that as you grow, if you have some degree of concerns, I would probably hire somebody just to not necessarily It could be a full-blown audit. It could be an internal audit. It could be, I want someone to come in and actually control my processes inside. I don't get a report that I can hand out to a bank or to anybody else, but I get somebody who can report to me and say, yes, this is what's happening, and this is what we're going to catch. Fraud is tough to catch. Fraud is tough to plan for. Collusion is tough to plan for, because now you don't find one, you have to find two.

[00:14:30.17] - Dan Paulson

Or multiple.

[00:14:32.15] - Rich Veltre

Or multiple. And then you have an additional piece that I wanted to mention, too. I said, when I was thinking about it, it's not just the actions of what you do internally. We have to talk about cyber theft now. And how can that have an effect? How are you mitigating the fact that someone from the outside can actually get to you, which I had. I had someone who actually sent some an email to someone inside of a company with a link in it, and the guy inside clicked the link, and the link actually allowed this outside perpetrator to monitor his system from outside. So She was actually able to get into the system and was able to follow his emails. And when he followed the emails, he figured out that I have the guy who is responsible for sending out company wires. And this company was building out warehouses, and the construction companies were sending him bills for as much as a million five. So what they did was, they sent an email to this guy and said, please change our banking information to X, and had a header that looked like it was from the right people And please send it to Suntrust Bank.

[00:15:48.10] - Rich Veltre

And I think the funny part was when you looked at it later, Suntrust was spelled wrong. So there were plenty of places they could have caught it, but nobody caught it. Got the email, looked at his supervisor and said, do you think this is legit? Supervisor said, well, it came from them. It looks like it's legit. Went to the other guy who was responsible, showed it to him, and he changed the banking information.

[00:16:15.02] - Dan Paulson

So nobody made a call, though.

[00:16:17.05] - Rich Veltre

No one picked up the phone, which was an internal requirement. Pick up the phone, verify the banking information. They didn't do it. And Essentially, because they pow out internally, they thought they were all going to be okay. That next million five that went out didn't go to the right people. It went out and was lost. So you now have to deal with putting protections in place for things outside. And it's a real thing. It's not fake. These procedures of just two minutes picking up the phone and talking to somebody would have saved them a million five. At the end of At the end of the day, I think they got a little bit of insurance money back. They found the account it went into, and there was still some money in there. So I think they lost a little more than half of it, but they only recovered the other half. The rest of it's gone.

[00:17:13.26] - Dan Paulson

And trying to find a person like that will probably be impossible because the money is moved from one account to the next, and it's usually overseas. So the chance of you actually holding somebody a task on it could be impossible.

[00:17:25.25] - Rich Veltre

Yeah.

[00:17:27.05] - Dan Paulson

I had a similar situation. It wasn't I dealt with directly, but I know some people who did where they were basically cyberhacked and held for ransom. So somebody accidentally loaded some ransomware on the system. It completely shut them down. And there are 24 seven business. So they end up having to pay in Bitcoin to get everything turned back on. And then I think a month later, the same thing happened. They came, they doubled They came back again. This is why you invest. If something ever like that happens, you have to invest in upgrading your cybersecurity and upgrading your systems to make sure that whoever got in there didn't leave something behind so that they could repeat the process all over again, because that gets really expensive, not only if you have to do it once, but then have to do it twice. And then you also have to go through the system with somebody who is good at IT and find out where all the gremlins are hiding so you can get those taken out so they can't turn you off again. There's another situation, but somebody they've agreed to come back on. Matt agreed to come back on, but he had a unique situation.

[00:18:44.11] - Dan Paulson

And this is more on the operations side, where he hired a consultant, and that consultant came in, but they did something rather nefarious to him at a point of, I'll call it emotional weakness. And he'll explain a little bit more about that. But then it could have ultimately cost him his company what this person had done. And this is where it gets really scary with people on my end, because you hire somebody like me, you're trusting them to do a task, a job. We're not directly dealing with money, but we're dealing with people and systems and process. And if you're not careful, that can be very costly as well. So any time you bring on an operations person, a consultant, you really need to make sure that the lines of communication between you and that individual or that group are wide open. You know exactly what they're doing. They're explaining to you how they're doing it. And you are brought along the way. You're not just off in a corner letting them do whatever they do, because that's a mistake. And I see that happen a lot, too, where now we go from not trusting at all to over trusting.

[00:19:51.19] - Dan Paulson

We bring somebody in to do a job, but then there's no checks and balances that they're actually doing what they're supposed to be doing. And more importantly, they might be doing something that you don't understand, and they're not teaching you what they're doing or how they're doing it, which now creates a further problem when they leave, because now you got to keep those systems and processes going. So it becomes really important to make sure that you're involved in whatever process, and whoever you bring into the organization, whether it's fractional or whether it's full-time, because the things we're talking about aren't unique to somebody who's just going to be there 5 or 10 hours a week. Somebody who's working 40 hours a week could do any of these things that we're discussing. And if you're not careful, that's where it gets really costly and damaging to your business.

[00:20:33.11] - Rich Veltre

Totally agree. I think the transparency level has to be extremely high, and you can't be hands-off. You absolutely 100 % can't be hands-off. I had another client that was similar to that, that there were plenty of ways that they should have caught the fact they brought in a fractional CFO who actually was a criminal. Yeah. And they were so hands off that they did a background check, but they never actually read it. So the background check was in the file, and it showed that the person had been in prison for financial crimes, and they made him the CFO. So that's a little scary that they let that happen. Actually, it's a lot scary. But it's really what it comes down to what I said before. You have You have to be in charge of the oversight. You have to understand what's happening, and you have to have accountability of the people who are underneath you. So depending on how big you get the organization to go, there still has to be a level of oversight. People have to be answering to your questions to make sure that there's nothing going on that you don't know about.

[00:21:47.17] - Dan Paulson

Right. And let's just be clear about that, too. You're hiring people to make changes in your systems. Those changes are going to get uncomfortable. So you also have to understand, have to know the difference between when you need to allow that change process to work its way through versus when you need to put a stop to it because it could damage your business. And that's where, again, full transparency and communication becomes so critical, whether it's financial operations, marketing, IT, or any of those various functions that you might acquire outside help with, you really have to understand what's going on. And vague answers don't work. They should be able to sit down with you, explain exactly what they're doing, explain exactly how they're and exactly how they're communicating back to you, what's successful, what's not working, what needs to change. And if they're not willing to do that, that's where things to me would get a little scary. So then you should really question the relationship and whether or not you should be working with that company or those individuals. So just keep that in mind. Rich, anything else we need to touch on on this?

[00:22:51.17] - Dan Paulson

I think this is a good start and hopefully helpful with companies or individuals that are looking to maybe hire some outside help and just want to cover their bases I think these were the good ones.

[00:23:02.06] - Rich Veltre

I think these were the big ones that people really need to understand. So I think it's good.

[00:23:07.22] - Dan Paulson

Good. I'm sure we will have more guests on to talk about these various situations in their own personal experiences. So keep that in mind and watch for that in the next coming weeks or coming months. Rich, as always, it's fun to chat with you, and we will talk to you again next week.

[00:23:22.27] - Rich Veltre

All right. Talk to you later.

[00:23:24.15] - Bob

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