Nice Article in Business New Hampshire Magazine on Embezzlement Phenomenon

They'd Never STEAL From Me!

Published Monday, February 21, 2011 7:00 am

by JOHANNA KNAPSCHAEFER

It's always the guy in the mask we fear, sneaking in under the cover of night and making off with our computers and cash. Or the anonymous hacker in another country electronically ripping us off. We never think it will be Sue in accounting. She brings in munchkins for everyone on Fridays for goodness sake!

It is a sad fact that even the most trusted employee can give in to temptation. With so many people under financial pressure, business owners and managers need to watch company ledgers carefully to ensure that they don't become the next embezzlement statistic.

Before you think that this would never happen to you, consider this. Small- and medium-sized companies, which make up the bulk of businesses in NH, are the most vulnerable. An analysis by Boston-based investigative consulting firm Marquet International of more than 1,000 embezzlement cases during the past three years reveals that the majority of victims are privately held small- and medium-sized businesses. "Small businesses are most at risk since a few hundred thousand dollars of embezzlement can totally devastate a business," says Chris Marquet, CEO of Marquet International. In the past few years, many businesses have searched for ways to cut costs, but shaving some procedures could hurt them in the long run. "Employers may look for ways to save money that can put them more at risk for missing irregularities," says Andrea Johnstone, a labor attorney at Bernstein Shur in Manchester. She says companies may not engage in the same internal and external financial reviews or may employ them less frequently to save money. They may also opt for less expensive financial reviews rather than audits, or discontinue key security measures such as video surveillance, she says.

Johnstone recommends companies assess the nature of their business and decide whether vulnerabilities to embezzlement, employee theft or fraud outweigh the risk of discontinuing loss prevention practices.

Who's Embezzling?

According to a 2009 Marquet International study of more than 400 major embezzlement cases, a typical embezzlement scheme cost the employer nearly $400,000 and lasted about four and a half years. Most thefts were committed by longtime employees with no prior criminal history who worked alone, and about two-thirds were committed by women, although men usually stole larger amounts.

Bill Christie, an attorney at the Shaheen & Gordon law firm in Concord, says fraud typically arises when one employee has access to a company's finances, usually a bookkeeper who has established a history of trust and has access to checkbooks, computerized checking systems and QuickBooks. "Companies fall victim when one person is responsible for cash flow and no one else is supervising their work," Christie says.

Steven Winer, an attorney at Orr and Reno in Concord, says embezzlement can involve fictitious payees. A bookkeeper, for instance, may issue checks to phony vendors, funneling money to themselves. "This is not unique to the electronic age, but if the embezzler is clever, they can do these dishonest things easier using electronic tools," Winer says.

While embezzlers typically steal money, they sometimes steal merchandise, usually expensive items, such as jewelry or art. But less expensive items can be attractive to embezzlers. Johnstone says she knew of a pasta manufacturer where an employee removed products to sell on eBay. "They got away with it because the transactions were not easily traced back to a particular worker or vendor," she says.

What is the Motive?

Eric Mart, a forensic psychologist in Manchester, says only Shakespearean villains rub their hands together and say "I did it!" "Most people who commit crime have cognitive distortion-they justify it," he says.

There are a variety of reasons why people resort to stealing from their company. Some embezzlers are nice people who commit a crime that is not characteristic of the rest of their life but may be in response to circumstances, Mart says. "That could involve a marital partner who doesn't have money coming in or a house under water," he says. Other less common cases involve psychopaths, including serial embezzlers. "Some people have no conscience," he says.

Christie says he usually sees one of two types of embezzlers. One is cash-strapped. "They figure they can take it and pay it back, but things snowball and they can't repay it," he says. The more rare type involves a thief who feels entitled to the money. "They may feel underpaid or not treated well and think they can supplement their income," he says.

Marquet says he has seen embezzlement cases involving people with medical crises or gambling problems. "But even in down times, an overwhelming number of cases are motivated by people who want to enrich themselves and live a more lavish lifestyle than a $45K bookkeeping job can afford," he says.

Most embezzlement starts small. Depending on the size of the company, the amount of cash embezzled begins with a paltry $10 or $20 up to $100 or $200, Christie estimates. Typically, there is an immediate need for the cash. "Often the person taking the money loses track of how much he or she has taken and they often lose perspective on how much they have taken," he says.

When clear policies for handling money or cash distributions do not exist, embezzlers may make distributions to themselves, Christie says. "In the absence of a clear policy, businesses have little recourse since the embezzler can claim they were authorized to make a particular distribution," he says.

Red Flags

Richard Maloney, an accountant and attorney at Maloney & Kennedy in Auburn, says companies should not necessarily rely on financial statements to discover fraud. "Financial statement audits are not specifically designed to uncover fraud, although they include testing of financial systems to prevent fraud," he says.

Instead, companies need to recognize telltale signs, he says. Companies should be vigilant, for instance, if their bank notifies them about an unusual transaction; cash seems unusually tight; certain expenses are reported as much larger than they should be; or payroll records indicate someone other than an employee may be receiving paychecks. Businesses with lots of cash are particularly vulnerable-including retail businesses with moderately priced items or those that limit use of debit or credit cards, Maloney says. Physician private practices are also commonly victimized, Mart says, since they have limited business experience.

Don't expect an employee that's rerouting company funds to their own account to flaunt their newly found wealth. Christie says that's rare. It's more likely that a manager may discover an unexplained shortage in a company's books or a discrepancy in cash flow. He says, "If your vendors are typically paid on the 15th of the month, but suddenly they're getting paid on the 30th, maybe the embezzler needs an extra 15 days to cover up the money they stole."

Legal Options

One option for a company that suspects irregularities is to have another financially competent person at the company review the company's financial records. But Christie says that can be difficult to accomplish. "Small business employers concerned about interpersonal relations may not want to accuse someone of doing something they may not have done," he says. And there may not be another person available to conduct such a review.

Another approach is to hire an auditor that will cost from $75 to $200 per hour on average, according to the National Association of Fraud Investigators. "An accountant can say, ‘we're conducting an audit to see if we find any improprieties or irregular transactions'," Christie says.
If something unsavory is discovered, businesses need to have all the facts before contacting the police. Christie and other attorneys interviewed for this article recommend hiring a certified public accountant to track the cash, analyze what funds are going where, and uncover the magnitude of the problem. Having as much information as possible may determine whether there are grounds to file a criminal complaint and how much a business can expect to recover.

If the firm has proof the employee has taken money, the case should be referred to law enforcement after the employee is fired. However, a company may consider filing a civil case. A company might opt to file a federal case for larger theft involving manipulation of banking records or electronic funds transfers, Christie says, as opposed to an employee writing checks to cash or stealing cash from a drawer.

Companies will also need to shore up their internal procedures. A business that has suffered a financial loss due to embezzlement needs to examine its cash control system to discover what could have been done better and fix it, says Winer of Orr and Reno. It's a good idea to require two signatures for checks issued for vendors, he says.

The loss of money is only one way a business can suffer from embezzlement. There can also be psychological fallout, but Mart urges business owners not to overreact to feelings of betrayal. "If you are overly paranoid, that is not good for business," he says.

Read the article here.