Embezzlement
…
Yes,
This Could Happen to YOU!
It's a dirty little secret among more companies than you would imagine. They've been robbed -- not by a masked bandit with a gun, but by a trusted employee who betrayed their position by turning embezzler. The amounts stolen may be small bits over a long time, or they may be staggering sums over a fairly short period.
Leeching by an embezzler can close a small company
and can even put the owner out of his home, if it is pledged as collateral for
a business loan.
In most cases, the embezzlement was possible because
the business owner or manager made foolish decisions about the handling of
money. Experts say that chances are good it could happen to any small business
owner.
No definitive statistics exist to chart the number
of embezzlements, because most companies are ashamed to admit it happened to
them.
"It's probably a lot more common than we're
aware of because a lot of companies don't report it," explains Elgin
Police Detective Mona McKinley, who investigated several area embezzlements in
the last year.
One study estimated that about one-third of all
employees have stolen money or merchandise on the job, while another calculated
that employee theft occurs in 95% of all companies, but is uncovered fewer than
10% of the time.
Those numbers come from the Austin, Texas-based
Assn. of Certified Fraud Examiners, a trade group of accountants who uncover
fraud.
Embezzlement is a type of internal theft, and it
occurs in companies large and small. It's such a touchy topic for business
owners, who feel at once victimized and foolish, that none wanted to be
identified in this article.
But a short sample, compiled from law enforcement
agencies, of embezzlements in the last few years shows how common and
devastating this crime is for small local companies:
Over three years a bookkeeper stole approximately
$545,000 from a small suburban manufacturing company. The bookkeeper was able
to steal easily because her boss signed blank checks to cover bills when he was
to be out of town; the bookkeeper has pleaded guilty to writing at least 60
checks to herself and to stores.
When she stole all of that money, the bookkeeper was
on probation for stealing $48,000 from her previous employer, another small
suburban manufacturer.
An office manager siphoned more than $49,000 from a
small construction company over 18 months by writing checks to himself and by
charging corporate accounts for personal items.
The loss was so staggering that the company owner
had to lay off most of his workers and is trying to save his home from
foreclosure.
A bookkeeper is charged with stealing $85,000 over
three years from a small petroleum products company. He appeared to live
frugally, but is alleged to have written checks to himself, then inflated
inventory costs to cover the loss.
An office worker is charged with stealing at least
$507,000 over eight years from an Elgin neurologist's office. Police say she
diverted payments from insurance companies to herself, although she seemed to
live simply.
Companies stumbled upon most of these thefts purely
by chance. Most might have gone on much longer, toting up even greater amounts.
Without exception, these losses could have been avoided easily by what --
in hindsight -- are obvious precautions.
Rule No.1 for the handling of money in companies of any size: Never let one person, no matter how well you know them, control all payments and receipts.
"If they control all the assets, you're at
their mercy," warns Patrick Moran, a former Oak Park police officer and
forensic accountant with Chicago's Blackman Kallick Bartelstein. When money-handling duties are consolidated
in one person, it becomes easy to hide missing funds in a variety of ways.
Costs of inventory, marketing or services can be
padded, or dummy invoices created. Phony credit slips can cover the loss of
cash.
Checks
written to improper recipients can be removed from bank statements and
inquiries from a bank questioning odd transactions can be intercepted before
the bank alerts the boss.
Problem is, most small businesses can't afford extra
accounting employees for a real check-and-balance system. And during times when
the economy demands job cuts, number-crunchers may be the first to go.
"It's not uncommon that these problems surface
in a cost-cutting environment. When you're cutting costs, it's usually in a
function that doesn't generate gross revenue. You might cut auditing or
accounting before you cut sales or production," explains Jack Burke, of
Chicago's Burke & Associates, another former Chicago police officer turned
fraud auditor.
Many small business owners too busy to watch the
books carefully do their own imprecise oversight by what accountants call
"benchmarking," having in mind rough numbers of what sales and costs
ought to be. As long as monthly totals are within that ballpark, the boss
doesn't get worried.
But Mr. Moran tells of a client who lost $48,000 in
18 months when an employee slipped personal bills into a stack to be signed by
the boss. The employee then hid the costs among the company's general expenses.
"The business owner was benchmarking, but that
failed him, because the bookkeeper was smart enough to make sure that expenses
seemed a reasonable amount of sales," Mr. Moran says.
Many small companies forgo a yearly audit,
considering it an unnecessary expense, but the cost of not doing an audit can
be far greater.
"A full audit costs a lot, but it's worth it.
It will seem like something that's expensive to do, maybe even something
unnecessary to do. But it's much cheaper to have internal controls in place
upfront than to call an attorney later on and try to chase down an
embezzler," warns Chicago attorney Neil Lloyd of Schiff Hardin &
Waite.
Mr. Lloyd represents the manufacturer who lost
$545,000 to the bookkeeper.
That client, Mr. Lloyd says, made several mistakes
that proved very costly.
Besides not getting a regular complete audit, the
company vice-president left signed blank checks with the bookkeeper when he
left town so she could pay the bills.
"It's not an overstatement to say never do that.
It's the kind of thing in retrospect that never should have happened,"
says Mr. Lloyd.
Similarly, the company failed, as do most companies,
to do a background check on the employee, an inexpensive process that would
have turned up her record of recent theft from a previous employer. "One
kernel of advice I would give is to do a criminal background check and to have
(people who handle money) bonded," Mr. Lloyd suggests.
A job applicant must give permission for a criminal
background check.
Also check an applicant's history with previous
employers, although that is less reliable, because some may not be frank.
"One of the problems is that many prior employers won't share insights
because they're afraid of being sued," says Mr. Burke.
For a business owner to sign blank checks for an
employee may seem ridiculous, but it happens frequently. Other bosses believe
they maintain control of the purse by signing all checks themselves.
"The truth is, they don't have the time to
review all the documentation. They don't really look at every check," says
Mr. Moran.
Who should a business owner look at as a potential
thief?
Everyone -- including a relative -- who handles
money. A cashier may skim receipts by not ringing up a sale, then pocketing the
money. Someone in customer service may create phony credit slips for
nonexistent returns, then take the money.
Bookkeepers and controllers are in positions to do
even bigger damage. They tend to be well-educated, smart enough to remain
undiscovered for long periods and seemingly too well-mannered to be criminal.
"The typical embezzler never takes any time off
work. They don't take vacations, they don't let anybody else get the
mail," says Detective McKinley, repeating advice she gave to west suburban
business owners in a recent seminar. A thief looking to cover his tracks may
fight even small changes in accounting procedures and may get territorial over
petty things such as who should make a bank deposit.
"When we started talking to (Detective
McKinley), this guy fit all the criteria," says a supervisor for the
petroleum company, recalling the bookkeeper who made off with $85,000.
"Generally, embezzlement is economically
driven. It's someone who gets into a higher standard of living or they have a
spending compulsion. Usually there is a vice involved -- drugs, gambling, sex
or, most often, plain greed," sums up Mr. Burke.
A few embezzlers steal to get even with the boss.
Mr. Moran recalls a small real estate rental company in the south suburbs that
called him in 1993 because their accounts seemed off.
"I met with this guy who managed the cash. I
noticed there were some checks missing from the end of the checkbook, so right
off I ask him, 'Where are the checks from the end of the book?' He looks at me
and swallows. And he says, 'I didn't take anything that wasn't coming to me.'
"
"He felt he wasn't paid enough. He took about
$8,500 over five years, but in his mind he didn't do anything wrong," Mr.
Moran says.
Embezzlement usually starts small and then builds,
once the thief sees that it is easy. "An embezzlement is rarely, if ever,
one transaction. Once they begin, they rarely stop because it's so easy,"
says Mr. Burke.
He recalls a group of physicians whose assistant
quietly stole more than $500,000 over 20 years, avoiding detection "because
she didn't get overly greedy."
Once a company unearths an embezzler, there is the
question of what to do.
Most companies keep quiet, firing the employee but
not pursuing legal action. "There are companies small and big that don't
pursue criminal prosecution. They feel so wounded. There is a lot of impetus to
say, 'The money is gone, let's move on,' " Mr. Burke says.
And, he concedes, "I don't hesitate to tell
them, 'You'll get no joy from prosecuting them'." Costs to hire
accountants and attorneys and to take managers' time away from regular work are
substantial.
But attorney Mr. Lloyd argues for legal remedies.
His client has brought criminal charges and a civil lawsuit against the
bookkeeper who stole money.
"She did not commit her crime with a gun, but
she cost this company and another company significant amounts of money. Our
cooperation with the U.S. Attorney's Office we see as a public service,"
he said.
Mr. Burke, the ex-cop, is more blunt: "Is it appropriate as a good corporate citizen to release this person to victimize someone else? We have people in prison for stealing a lot less. I'm (tough). Somebody who'd be that disloyal to you -- I say cut them off at the knees."