Case Studies

A manufacturer in the Pacific Northwest (we’ll call it Red Flag Manufacturing or “RFM”) had enjoyed such success, the owner 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.

In hindsight, Matt and others at RFM overlooked some glaring red flags, including:

• Connie had a new outfit every week — beautiful new trendy clothes.
• Connie had plastic surgery – more than once.
• Connie had her hair and nails done weekly and often took off during regular work hours to keep her appointments.
• Connie drove a $50,000 SUV with all the bells and whistles.
• She shopped online while at work and had personal purchases delivered to the office.
• Connie asked one of the shop workers for advice on buying an ATV. She bought two ATVs but a month later decided she didn’t like them and gave them to her sister. Then she bought two more ATVs, complete with a nice new trailer and all the necessary protective equipment.
• Connie’s husband had a job earning about $30,000 per year, so that didn’t explain the expensive habits.

LESSON: All these red flags fall under the category “living beyond means,” which 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.

A few years before the theft was discovered, Connie told Matt she needed help in the office and recommended her sister, Bonnie, as a part-time bookkeeper. Matt agreed and Bonnie was hired. No background check, no reference check. Just prior to joining RFM, Bonnie had been convicted of stealing from a local organization. Neither of the sisters reported Bonnie’s criminal history to Matt.  A simple background check, an internet search or a reference check would have revealed it.

LESSONS:

• Don’t hire your employee’s family members, especially if they will be in a direct reporting relationship or will work closely together.Always perform a background and criminal history check on new hires.
• Always check references from prior employers. Since Bonnie had been charged and convicted, her prior employer probably would have revealed her criminal history.

So how was Connie able to steal so much for so long?

• Matt, the owner, concentrated on sales and growing the company; he was distracted with personal issues so he didn’t keep close tabs on the books.
• Connie had sole control over all aspects of bookkeeping with no oversight. She did the ordering, purchasing, deposits, credit cards, disbursements, payroll, payroll tax returns, financial statement preparation, bank statement reconciliations, and everything else. Once she started stealing and realized there was little chance of getting caught, she just kept doing it and enjoying the fruits of her labor.
• Other employees knew something was up but didn’t report it for fear of losing their jobs.

Fraud training for managers and employees is a way to teach people how to identify suspicious behavior and communicate it to the appropriate people. It is also a way for owners and leaders to communicate their expectations regarding accountability, transparency and integrity.

LESSONS:

• When someone is stealing, other employees often know something is going on. Consider an anonymous hotline so those employees can tell someone their suspicions without feeling like they are risking their job.
• 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), you should create a perception of detection, so employees think it is likely they would get caught if they try to steal. Have a forensic accountant make unannounced visits in which 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 is serving a 19-year prison sentence. Matt also filed a civil suit against her so her legal woes are ongoing. 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.

True or False? (Hint: They are all true.)

1. Only your trusted employees can steal from you; they’re the only ones with opportunity.
2. It’s important to trust your employees, but it’s possible to trust too much.
3. Many fraud schemes go on for years before they are discovered.

It’s better to deter theft from happening than to deal with the fallout afterwards.