Unconvering employee theft

In this climate, the small and medium-size businesses that make up the bulk of the Northwest Florida economy have the most to lose.

An Enemy Among Us Increasingly, small businesses are finding themselves victimized by those they trust the most By Tim Collie


He had watched her grow up. She had babysat his children, vacationed with his family and worked summers at his small business. When the time came, she seemed the perfect choice to be his bookkeeper.

And that was why he broke down in tears when the auditors he hired to locate a cash flow discrepancy found she had stolen more than $200,000 from his business over several years.

"That’s not that uncommon in our business," said Glenn Gillyard, a partner in tax and forensic services at the Destin office of Carr, Riggs & Ingram LLC, one of the largest accounting firms in the southeastern United States. "You have these trusted employees, often in small businesses, that people don’t oversee. They may handle the money, the billing, the bank statements and check writing, and when times get tough, they’ll steal from you, too."

This type of case — like many others totaling millions of dollars in lost income that Gillyard has dealt with over the years — never appears in newspapers and often doesn’t result in criminal prosecution. In fact, in many cases, employees walk away with nary a blemish on their resume.

Businesses, especially small companies already on the hook for tens or hundreds of thousands of dollars, don’t want the added time and cost of more audits and lengthy trials, not to mention the embarrassment. Nor do they want the risk of a slander lawsuit if the proof isn’t 100 percent solid.

So the criminal often walks, and the company quietly licks its wounds before adding up a cost to business that experts estimate totals some $450 billion in U.S. employee-related fraud every year.

And that number could be just the tip of the iceberg. Forensic accounting experts now believe that employee theft is outpacing shoplifting nationwide and is likely surging with the worsening economy.

"Employees pose the greatest threat to organizational resources in the current economy," according to a report released by the Association of Certified Fraud Examiners earlier this year.

They can’t prove it yet — "the frauds occurring right this minute haven’t been discovered yet, so we can only guess at how much they’re growing in scope,’’ said the association’s Allan Bachman — but the combination of layoffs, delinquent payoffs and owners just happy to see any cash flow is a perfect storm for fraud.

Fewer people also are doing more work at many companies, and the advent of the technological revolution has created myriad new ways to falsify billing, create ghost employees or customers, and misplace inventory.

"Circumstances can cause good people to do bad things, and in today’s economy where you have a loss of jobs, and you’ve got salary reductions, declining property values and heightened credit criteria, all those create strain on a person’s finances," Gillyard said. "And they can put someone in a circumstance where they consider doing something they wouldn’t have considered before."

In this climate, the small and medium-size businesses that make up the bulk of the Northwest Florida economy have the most to lose. While the Bernie Madoffs get all the ink, it is the bookkeeper or office manager at a doctor’s office, pest control business or plumbing company who is responsible for some of the largest individual takes in white-collar crime.

Businesses in the United States lost an estimated 7 percent of their annual revenues, about $994 billion, last year due to fraud. That was up from an estimated $652 billion — 5 percent of revenues — in 2006.

But here’s the staggering statistic: About half of last year’s amount — at least $450 billion — was lost by businesses with fewer than 100 employees, according to the FBI. For large companies, the typical theft might be $90,000. But for small companies, the average loss is about $127,000, according to the Association of Certified Fraud Examiners and other organizations that have studied employee fraud.

"Smaller companies are actually more vulnerable and experience greater losses than the larger ones," Gillyard said. "The larger companies have more controls, and they have more separation of duties, and they have more checks and balances, so it’s easier to discover. The smaller companies, you may have just one or two people handling funds, so it takes longer to discover. And it goes on longer."

In Northwest Florida, condominium associations and physicians’ offices can be particularly prone to employee theft. The state’s recent spate of hurricanes and destructive storms has brought huge sums of insurance money coursing through condo association coffers. Likewise, many physicians run small offices in which one or several employees may have multiple duties involving cash flows. That should raise many red flags, several accountants interviewed said.

"You’re looking for things like cash flow problems, what appears to be missing inventory, other discrepancies, lost inventory, a spate of unusual expenses in category or amount,’’ Bachman said. "It doesn’t have to be something overly sophisticated, but it may take a trained accountant to spot it. For example, if you’ve got a regular series of expenses or billings to a customer, you’d be looking for something like invoice numbers in sequential order to a particular customer. That would raise a red flag."

A survey of 507 certified fraud examiners earlier this year indicated that most expect theft to grow in the coming years. Nearly half, some

49.1 percent, of respondents cited increased financial pressure as the biggest factor contributing to the increase in fraud. Less than one-third indicated that they thought increased opportunity for fraud was to blame, but roughly another one-third suggested that layoffs at their company had increased the probability of employee fraud.

Within the workplace, "occupational fraudsters are generally first-time offenders," the Association of Certified Fraud Examiners warns. In a 2008 report, it found that a mere 7 percent of perpetrators had prior convictions, and only

12 percent were let go by previous employers because of charges related to fraud. These findings reinforced similar results by the group in 2004 and 2006, as well as studies on employee theft by the FBI.

The good news is that these crimes are relatively easy to spot if a company’s books are audited. Questions of incompetence or honest accounting errors are generally ruled out quickly, in part because they often lack as smooth a pattern as an actual crime.

"The majority of them are good people — you confront them with the evidence and they just break down,’’ said Allen Blay, a former independent auditor in the banking industry who is now an assistant professor of accounting at Florida State University in Tallahassee.

"They were not intentionally stealing from the company," Blay recalled of his experiences. "In their mind, they were borrowing. When things got better, they told themselves that they were going to return it."

And most first-time embezzlers do not cover their tracks very well. One of the clear warning signs owners should look for is an employee flaunting new cash, spending beyond his or her means with new cars, homes, wardrobes and even physical makeovers.

In 39 percent of cases it reviewed, the Association of Certified Fraud Examiners found that perpetrators were living beyond their documented means, and one-third of them had a history of financial difficulties before they committed the fraud.

So the fraud was easy to spot for those paying attention, especially other employees. The bad news is that these warnings are rarely acted upon until the "horse is well out of the barn," Gillyard said.

Word to the Wise for Small-Business Owners


The best advice fraud experts give to business owners worried about employee theft is pretty simple: Don’t keep all your eggs in one basket.

Or to be more precise, don’t let one employee handle your money matters. Establish a system in which one person writes checks while another employee may handle sales and yet another takes care of inventory.

That, of course, can be hard in small companies with maybe a dozen employees and earnings of less than

$10 million a year. But it’s the single most important thing forensic accountants — those who specialize in spotting theft — can tell a business owner.

"So many of these frauds occur at small companies where you have sales people who have the ability to make a sale to a customer and they also have access to the warehouse to get the inventory," said Allen Blay, an assistant professor of accounting at Florida State University and former bank auditor who has uncovered numerous frauds.

"At that point, they can steal the inventory until another inventory account is done, which at many small companies is not for several months," Blay said. "They can be pocketing the cash, and nobody knows any differently."

It also doesn’t hurt to be proactive. Blay recalled the story of the owner of several laundromats who had several employees collecting the weekly take from washers and dryers around town. The employees were doing it individually — a problem from the start because they should have been paired.

On a whim, the owner had everyone switch. The machines weren’t monitored to record cycles, but he noticed that some stores differed wildly in their weekly takes. He changed up the employees again and pinpointed the problem to a certain collector.

Finally, the owner put marked bills in those machines and waited for them to show. When they didn’t, Blay said, he confronted the employee.

Problem solved. — Tim Collie