Case Studies

After celebrating four years of growth and prosperity, the owner of a manufacturing in the Pacific Northwest (we’ll call it Red Flag Manufacturing or “RFM”) decided to start an employee profit sharing program. RFM was a small family business employing about 40 people.

When the owner (let’s call him, “Matt”) started looking at the books, he noticed some suspicious transactions, and significantly less money than the business should have had.

The subsequent investigation revealed that the office manager (“Connie”) had stolen at least $1 million over the last 10 years of her 14-year tenure. There were also some suspicions regarding her sister (“Bonnie”) who was employed as a part-time bookkeeper.

Living Beyond Means

In hindsight, Matt and others at RFM overlooked several red flags, the most glaring of which was that Connie was living beyond her means. She and her husband made about $70,000 per year, yet Connie wore beautiful, trendy, expensive clothes, had plastic surgery (twice!), dove a $50,000 SUV and treated her family to lavish vacations. She also ordered goods online while at work and had them delivered to the shop, including a pair of all-terrain vehicles complete with a trailer and all the gear.

Lesson

This is one of the most common signs of employee theft. Everyone else at this small company noticed that something was odd about Connie’s lifestyle. She was clearly living beyond her means and flaunting it to co-workers, family and friends. Why didn’t anyone say anything? The workers all assumed Connie had a “close personal relationship” with the boss. They assumed, incorrectly, that there was an explanation for Connie’s excessive lifestyle. So they kept their mouths shut, happy to avoid the unemployment line.

The Opportunity to Steal

Too much trust creates a situation where employees see little risk of being caught when they “borrow” money to meet some sort of secret financial need. Once an employee starts taking money or other assets, it’s nearly impossible to stop. In this case:

Lesson

One person should not control any transaction process from beginning to end. In this case, Connie controlled all the transaction processes so was able to steal a lot of money using several schemes. If you can’t separate duties (as in this case, because there are only one or two people involved in accounting), have a forensic accountant make unannounced visits where they look at the books, ask questions, check the supporting documentation, and do an analytical review.

The Fallout

Because of the theft, RFM never started an employee profit sharing plan, some employees were laid off and Matt tightened up on expenses. “Connie” was convicted and sentenced to 19 years in prison. RFM survived, but it’s been harder to weather the recession. Matt and his family are now more involved in recordkeeping, and there is transparency in everything they do.

Would you rather (a) go through a process like this or (b) prevent this from occurring? If you chose b, contact us today.