Experience has shown that embezzlers are opportunists that find weaknesses in systems and exploit them. The Association of Certified Fraud Examiners issued their 2018 Report to the Nation a Global Study. The study shows that employees commit the largest percentage of the occupational fraud for a lower dollar amount but the owner/executive level commit a smaller percentage for an extremely large dollar amount. The study also shows that as tenure in an organization increases the likelihood of a larger dollar amount embezzled increases greatly and there is a tendency for collusion with others to occur. Occupational fraud by departments showed that the largest risk of loss was in Executive / upper management, followed by accounting, then sales & operations. The greater majority of the fraudsters were male and caused larger losses than females. The age of the fraudster rises as the age and amount of the fraud increased, with the largest loss in the 56 to older age bracket. Again, the educational level tends to increase the risk of loss, with a college degree being the largest category. The study shows 85% of occupational frauds have not been prosecuted and instead 46% of the fraudsters were allowed to resign, or enter into a confidential private settlement agreement.
With this general information, it is imperative the business owners pay attention to who they are hiring and what is happening in their lives as they work for the company. The following are the main red flags that should be observed:
- Living above their means
- Financial difficulties
- Unusually close association with vendors or customers
- Control Issues, unwillingness to share duties
- Divorce or family problems
- Wheeler-dealer attitude.
- Irritability, suspiciousness, or defensiveness
Investigations conducted in the past revealed the following:
- A female controller in a financial institution compromised the Chief Financial Officer (CFO) with sex which allowed her to avoid internal controls and embezzle $600,000 via the use of multiple corporate credit cards. She was living above her means by driving vehicles and wearing clothing that were above her means. She was terminated and not prosecuted and the CFO was terminated and forfeited his partnership interest.
- A male CFO was having financial difficulties and thought he was underpaid by the charitable organization so he devised a scheme to create a fictitious vendor and bank account he controlled. After three months passed he started personally issuing checks to the vendor and not by having checks prepared by the accounts payable clerk. Finally, the accounts payable clerk brought the periodic check to the Controller’s attention. The QuickBooks Enterprise system identified the missing checks and the investigation begun and the scheme unfolded. The CFO was terminated and ultimately prosecuted by the county.
- Former fraternity brothers extracted $10,000,000 from a technology company by perpetrating a vendor fraud. The approving official inside the company used the company credit card in violation of company policy to pay for CAD work over a four-year period and he received a kickback for his efforts. They reached a civil settlement and were later prosecuted federally and received prison time.
- A male controller over 60 years of age in a company colluded with the male Information Technology (IT) person to embezzle $350,000 by use of false entries on the company accounting software. Checks were entered to them directly but on the books the payees were changed. The controller reconciled the bank accounts and buried the payments in the partner draw accounts. He was so dedicated to the company that he never took a vacation or cross-trained anyone for his job. He got gravely ill and a bookkeeper was brought in to take his place and she found the embezzlement. He and the IT were terminated and not prosecuted but civil action was taken against the homes they constructed with the stolen funds.
- A female bookkeeper for a church was going through a divorce and needed money to pay tuition for her children to attend the church school. There was no separation of duties in the accounting office of the church and she found a means to extract an electronic signature of the pastor and print it on the signature line of checks. She prepared the checks in her name and processed them through the church bank account. The bookkeeper became defensive with the pastor and was terminated. No one caught the forged checks until the parish council started asking questions about the lack of a bank reconciliation for four months. A Certified Fraud Examiner was hired and found the manner and means of the fraud on the bookkeeper’s computer. She was not prosecuted but agreed to pay back the $30,000 of embezzled funds.
- A female CFO with a Wheeler-dealer attitude was living above her means. She felt underpaid by her bosses, and she embezzled $8,000,000 in a weak internal control environment in by creating loans on the books of the company. The proceeds of the loans were used to buy a multi-million-dollar home for cash, she spent money on vehicles, motorcycles, gold bullion, and expensive and lavish vacations. The extent of the theft was not discovered until a buyer approached the business which caused a deeper look into the financial records. Although the company’s outside CPA firm prepared an annual “Review” of the financial records and mentioned annually the personal loans in their management letter, no one in management or the owners questioned the loan activity. It was determined that the owners and managers were also taking loans from the company but not as much as the CFO. The CFO was terminated and ultimately prosecuted.
The above matters are deeply concerning, cost the company operating funds, and damage relationships. They must be approached properly with an attorney and a financial investigator. If you or your client wants to be proactive to avoid these and other types of fraud or if you or they suspect an embezzlement in process that requires an investigation, a forensic accountant, and the possibly the testimony of an Expert Witness, please contact Chief Investigator Edmond Martin of Sage Investigations, LLC at 512-659-3179, or email: email@example.com. Let our 26 years as an IRS Special Agent and 16 years of Private Investigation benefit you and your clients. Please visit our website for our team and their CVs.
(1) Report to the Nations – 2018 Global Study on Occupational Fraud & Abuse