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by Stephen Parezo

Smart Brief

The U.S. Chamber of Commerce reports that $50 billion is lost annually due to employee theft and fraud. Embezzlements are often committed by highly trusted employees who had access and opportunity. Fraud danger signs include getting a notice from the IRS that payroll taxes have not been paid. One of the best ways to prevent this type of fraud is having the monthly bank statements mailed to the business owner’s home. Many embezzlers aren’t prosecuted since law enforcement agencies are busy trying to solve more high profile cases. Some companies go after suspected embezzlers through civil lawsuits. More businesses are trying to install a system of checks and balances with pre-employment screenings for those individuals that have a fiduciary responsibility.

January 25, 2007—Many small businesses have been victims of embezzlement by one of its key employees but perhaps what’s even more disturbing than those crimes is that embezzlers caught with their hands in the till typically aren’t prosecuted. Instead they are fired and end up surfacing at another business where the cycle perpetuates itself.

With the U.S. Chamber of Commerce reporting that $50 billion is lost annually due to employee theft and fraud, industry experts argue that unless victims of these frauds turn up the heat on law enforcement officials to see that embezzlers are punished, these crimes will continue to persist.

“Any white collar crime since 9-11 doesn’t get a lot of attention as a general rule from law enforcement agencies,” said Frank Scaffidi, director of public affairs for the National Insurance Crime Bureau. “I don’t think anybody can argue that fraud is not a crime but there’s a limited amount of investigative assets available that have priority over non-injury property crime. I can understand how that [mindset] comes about but at the end of the day it’s still a severe crime for the victims.”

Scaffidi says that business owners who want to have embezzlers pay for their crimes need to find some allies within law enforcement for justice to be served.

“Maybe you can move it up the steps to the mayors and county supervisors if they have sufficient law enforcement personnel to handle the problem,” he said.

Embezzlement is defined as the fraudulent conversion of property of another by a person in lawful possession of that property. These types of crimes usually involve a relationship of trust and confidence, such as an agent, fiduciary, trustee, treasurer or attorney.

Embezzlers often are highly trusted employees where something has gone on in their life is changed which led them to commit the crime.

“It could be a medical or financial hardship but very rarely do we see financial frauds perpetrated by new employees because they don’t have access,” said Bruce Dubinsky, president of Dubinsky & Company, a nationally recognized consulting firm in Bethesda, MD, that specializes in providing expert witness and forensic accounting services.

Lack of checks and balances

One of the easiest ways to prevent embezzlement is to have the monthly bank statements mailed to the business owner’s home or their accountant’s office. The moment it’s sent to the office it gives the embezzler the opportunity to strike since the employee reconciling bank statements often makes the bank deposits.

“Unfortunately most small businesses don’t have layers of control,” he said. “The owner isn’t checking over the bookkeepers’ shoulder.”

Obvious dangers signs for entrepreneurs to be aware of is if they’ve received a notice from the Internal Revenue Service that payroll taxes have not been paid or there’s been Non-Sufficient Funds (NSF) charges on the business’ bank account.

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Another red flag is the trusted employee that never takes a vacation because, Dubinsky says, “it’s hard to continue the fraud when you’re not there. Mandatory vacations are another preventative measure that really goes a long way.”

A common thread running through small businesses victimized by embezzlement is the lack of checks and balances since owners are out trying to build their operation while neglecting their own house. Dubinksy cited the example of a bookkeeper using an outside accomplice to pull off the dirty deed.

“Don’t let them add new vendors without your approval,” he said.

Despite being victimized by embezzlers, most owners do not pursue having the law enforced because they either have an employee dishonesty bond that will reimburse them for their losses, they want to avoid adverse publicity or they simply don’t want to take time away from their business.

“We run up against people who say, ‘I don’t hire criminals’ but people who embezzle are criminals,” Dubinsky said. “They are fairly bright people that for some reason have decided that they need to take the money. They know the difference between right and wrong.”

Owners are too trusting

But owners don’t want to get involved and this becomes a systemic problem that is not being addressed by law enforcement. Unless they receive a confession right away, Dubinsky explained that detectives are pursuing more high profile cases such as drug deals, rapes and murders.

Gene Polley, a senior business advisor in Fiducial’s San Diego, CA, office believes that the reason embezzlement persists is that business owners are too trusting.

“They just get into a comfort level and they never suspected this could happen,” said Polley. “They just think that they know the individual because they’ve worked with them. They just couldn’t believe it.”

To help prevent these types of fraud from occurring, Polley says small business owners need to have multiple eyes looking over bank statements and cancelled checks. This can be done quickly and easily so there’s no excuse for an owner not doing it.

“How long does it really take to make sure that there’s nothing suspicious there?” he asked. “I’d be surprised if it takes five minutes every month or so. It’s small insurance but it’s not being done.”

Polley pointed out that everybody he’s known that’s been defrauded would have caught embezzlers in the act in every case if they had only taken the time to look over their bank statements.

One of his new clients hired him due to very real concerns about business fraud.

“The owner wants to be proactive,” Polley said. “He asked me what I saw as weaknesses in his business. The fact that he had one person write checks and balance the checkbook was a big concern. That’s usually the case unless it’s a cash operation where someone has the opportunity to put cash in their pocket.”

Get proof before proceeding

Tony Daniels, a former assistant director of the Washington, D.C. field office of the Federal Bureau of Investigation, agreed that there’s reluctance among law enforcement officials today to go after embezzlers unless it reaches a monetary level of $50,000, depending on the jurisdiction.

It also depends on the type of company that’s involved. For instance, if it’s a Fortune 500 firm with stockholders, there’s more of a possibility that the matter would be pursued because they have ample resources to fuel an investigation.

“What we’re seeing is some of these smaller companies are not opposed to going after some of these embezzlers in a civil suit,” said Daniels, CEO of MDB International, LLC, a private investigative firm in Alexandria, VA. “In today’s environment they’ve got to have grounds to dismiss an employee.”

Daniels, who spent 27 years in law enforcement and has 12 years experience in the private sector, explained that companies are hiring private investigative firms for fraud issues. Depending on the scope of the case, private investigators may attempt to revert the matter to the prosecutor’s office or state’s attorney office. At that point, it’s up to the law enforcement agency whether to proceed. If investigators hand an investigation tied up in a bow over to law enforcement that shows there was embezzlement, the case stands a better chance of being pursued.

Although the crime committing cycle goes on for embezzlers, more companies are trying to head off fraudulent activity before it erupts.

“One of the things that a lot of companies are doing to try and give them a sense of security is pre-employment screening for those individuals that have a fiduciary responsibility,” Daniels said. “This goes a lot more on the executive level these days.”

Problems arise when a prospective employer contacts a previous employer about the candidate being considered and the old company is reluctant to be candid about any activity they observed since they’re afraid of lawsuits. In some cases, details were gathered using strictly public sources such as former co-workers.

Danger signals for employers to be alerted are if an employment candidate’s background includes a preponderance of civil actions, credit problems or bankruptcies.

Have a back-up plan

Embezzlers will remain active until they are detected and prosecuted but Daniels noted that companies are putting out more roadblocks to prevent it from happening. Businesses have better computer security and pre-employment screening, especially when it involves an individual with fiduciary responsibility.

“For example a signature level on funds distributed seems to be more of a trend to prevent this type of fraud,” he said.

Employers may suspect that an employee may be making unauthorized withdrawals but making a case against the alleged wrongdoer is not always easy.

“They still have to have proof if they’re going to terminate a suspected embezzler,” Daniels said. “They don’t want to spend money in litigations.”

Throughout Michigan there’s a lot of unemployment and job uncertainty due to the auto industry upheavals which sews the seeds for fraud opportunities, according to Dale Ellery, district manager of Fiducial’s Detroit, MI, region.

Before his accountant firm was acquired by Fiducial in 2005, Ellery recalled that his business had been a victim of fraud when an employee manning the front desk was embezzling monies that came her way. She went undetected until one of the other staff members thought some things looked suspicious.

“We thought we had a good system but she knew her way around here,” said Ellery. “She was collecting cash on tax returns and putting receipts in the book as if she completed the transaction. She also made the bank deposits and covered her tracks well.”

The fraud came as a shock to Ellery, a veteran professional, who believed he had taken measures to prevent such crimes from occurring. Since then, he’s made sure certain safeguards are in place to thwart the threat of fraud in the future.

“You have to build in checks and balances and have a back-up plan,” he said. “I’ve always cross-trained my staff.”

Stephen Parezo is the Media Manager for Fiducial

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