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Who's minding the store? Means to an end Detection and prevention

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CLEVELAND—It's hard to slip anything by Sheila Beck.

As a senior manager for Apple Growth Partners, an Independence, Ohio-based firm of certified public accountants and business advisers, Ms. Beck leads an auditing team that specializes in detecting occupational fraud using data extraction software and other tools at its disposal. In essence, finding needles in haystacks is sort of her thing.

And while many small businesses, including tire companies, are concerned about revenue loss resulting from outside forces—such as break-ins or even fraud committed by vendors—Ms. Beck said the biggest threat to a company's well-being is often internal.

“(External) types of thefts tend to be a one-off,” she said. “If your business has the most basic of controls—somebody's reconciling the check book and somebody's watching the checkbook and a check disappears—that's going to be caught pretty quickly.”

It's the internal theft that causes extraordinary losses over time, she said.

During a presentation Sept. 18 at ITEC 2012, Ms. Beck cited Association of Certified Fraud Examiners (ACFE) statistics that fraud costs businesses millions each year, with small businesses suffering median losses between $100,000 and $150,000. While people most often associate fraud with deceptive financial reporting, asset misappropriation makes up more than 90 percent of fraud cases.

“When it's somebody inside the organization and it happens over and over...that median loss is as big a number as it is for small businesses because often this theft can go on for years undetected,” she said.

In many cases, the fraud is perpetrated by the company's most trusted employee: “The employee that's like family, we've known him forever, he watches my company's money like he's watching his own, he would never steal from me,” she said, describing a likely scenario.

And typically the fraudster is a “he.” The majority of people who commit fraud, according to Ms. Beck, are males between the ages of 36 and 45 who work in accounting or other finance-related roles. They are most often a senior member of management and have been with the company for at least 10 years.

Also, the longer an employee's tenure with an organization and the more extensive his or her education, the larger the dollar amount that is stolen.

The reasons why these employees steal, Ms. Beck said, aren't black and white.

“We have a tendency to think anyone who steals money from their employer is just a bad person, they're rotten to the core and we would recognize that individual, and that's often not the case,” she said.

American sociologist and criminologist Donald Cressey first developed the theory of the “Fraud Triangle,” which comprises three factors that exist in most fraud cases: pressure, rationalization and opportunity.

Opportunity—the element most easily controlled by the business owner—is often the starting point for those who commit fraud.

“In most small organizations, it's very difficult to...prevent every individual from having an opportunity. There're so many opportunities to steal in every business,” she said.

Usually some form of financial pressure exists that pushes a person into stealing from his or her company.

“We tend to think a bad person is just stealing because they're greedy, but anyone can be tempted into a situation because they have a financial pressure,” she said. “Sometimes it's a gambling or a drug addiction, and sometimes it's a medical problem, something innocent.”

In many cases, this pressure is a result of the perpetrator's spouse's becoming unemployed.

“We saw fraud hit an all-time high in 2009 with the recession with so many people out of work,” she said. “If a household is used to two incomes, and that household drops to a one-income household, there's a lot more pressure on that employed individual.”

Rationalization, Ms. Beck said, also can be very powerful.

“What we saw is a lot of businesses had to lay people off,” she said. “Very often the remaining employees had increased workload. Sometimes business owners in our client base did across-the-board pay cuts.

“What happens is, if you're a person who survived the layoff, you're doing one-and-a-half person's job or you've taken a 20-percent pay cut so that everybody can make it,” she continued.

“After a while, you start feeling like you've been taken advantage of. And you might be looking at the boss or that business owner and thinking, 'I don't think he's suffering quite as much as I've suffered, and I haven't gotten a raise or a bonus for years. I'm doing more work than I used to have to. I deserve this.' And they can rationalize their way out of it.

Fraud can be perpetrated in millions of ways, Ms. Beck said, but it typically falls into only a few patterns. One of the simplest and most common is by setting up a fictitious vendor, which is “paid” just like any other vendor.

Often fraud is committed simply by stealing a check that's been filled out.

“Don't ever rely on the bank to keep (fraud) from happening,” Ms. Beck said. “I could take a check to my bank made out to John Smith, sign the back of it, deposit it and they would put it in my account.”

Ms. Beck said a change to UCC (Uniform Commercial Code) standards in the 1990s made it so that banks are no longer required to check for signature cards. “They have their own standards, but they can't be prosecuted anymore for allowing me to deposit a check written out to somebody else in my account.”

Travel and entertainment fraud also is common. Many companies have policies in place for entertainment and travel-related expenses that don't require receipts for expenses under $25.

“You'd be surprised at how many expenses for $24.69 or $24.24 get run through expenses if you have a policy like that,” Ms. Beck said. “My recommendation is to ask for a receipt for everything.”

But that won't always solve the problem, she noted, as there are websites that will allow people to create bogus receipts of varying amounts.

Occasionally fraudsters will set up ghost employees. Usually this is committed by a department manager, bookkeeper or someone else with access to payroll.

“Whoever has authority of cutting off payroll, if they simply let that payroll run one or maybe even two extra cycles, it's very simple for that individual to then take that check,” she said. “Chances are the employee terminated, say, in June. By the time they get a W2 next January they're long gone.

“They're working for somebody else, and generally they don't even notice their W2 is for a little bit more money than their last paystub. Even if they do, they're long gone.”

In retail businesses, such as tire shops, more common fraudulent occurrences might include skimming money from cash registers or substituting products.

“A tire store employee could take an unsuspecting customer, put on a $100 tire and sell me a $260 tire and pocket the difference,” she said.

Detecting fraud can be a difficult task, as money is usually stolen in small quantities over many months or even years, but Ms. Beck's agency specializes in finding evidence of theft.

One of the first places Ms. Beck's team looks for fraud is in cash disbursements.

“I look at who the checks are written out to, and I look for non-descriptive companies.... There aren't many fictitious companies with names like Apple Growth Partners,” she said.

If the company has a large list of vendors, Ms. Beck's firm will use a software tool that will strip out vowels and consonants in company names. A company with more than five consonants in its name is statistically more likely to have a descriptive one.

Her firm will also look for vendor addresses with P.O. boxes and compare vendor addresses with those of employees.

“If you have a match, that means your fraudster was a little bit lazy,” she said.

She also looks at the dollar amounts themselves. In any database of numbers, such as a database of the dollar amount of the checks cut by a company, the first digit is “1” more often than any other number and almost four times as often as it's “9.”

Ms. Beck noted that it's also important for business owners to disclose any suspicions they might have to a forensic auditor.

“If you have a suspicion or you suspect a certain employee or area where you think it's happening, it's best to—at the time that you hire a forensic auditor—give them some direction so that they're not just looking for the needle in the haystack.... If you have any suspicions at all, don't feel like you're tainting the auditor.”

While detecting and stopping fraud will save a business a lot of headaches in the future, preventing it from happening in the first place is the most cost-effective way to get rid of it, Ms. Beck said.

In addition to conducting surprise audits, business owners should maintain careful control of the master vendor file.

“The more you can control that master vendor file so that Sheila Beck doesn't have access to go in and set up SB Co. or S&B Inc. and start sending checks...the better,” she said.

Businesses should make sure checkbooks are reconciled regularly, assets are secured and physical cash receipts are put away in lock boxes. Owners also should have bank statements sent to their house instead of the shop, or at least make it appear as if they've looked it over themselves.

“Even if you don't want to take the time to look at it yourself, just open the envelope, wrinkle the paper, make a few marks on it, put a few question marks on the paper,” she said. “Even if you don't do it every time, the fact that somebody knows that somebody may be looking helps a lot.”

Installing video cameras—working ones or not—is another effective way to dissuade employees from stealing. Ms. Beck suggested getting five cameras and numbering them 1, 2, 4, 5 and 6, “so everyone's wondering, 'Where's camera 3?'”

Ms. Beck said requiring everyone to take vacations and rotating job functions also can serve as a means to detect and prevent fraud in the workplace.

“If somebody seems to be holding onto their duties a little too tightly, that can be a red flag,” she said.

Businesses can self-police by partnering with third-party fraud hotlines that allow employees to make anonymous tips if they see something.

Finally, if a business does find that fraudulent activity has been taking place, it's important to prosecute the person responsible, Ms. Beck said.

“Very often companies don't prosecute, and this is a mistake. If you catch somebody who's worked in your company for years and years, you feel bad, they feel bad, everybody's embarrassed and the company wants to just drop it and not prosecute,” she said. “What we see is that individual going to another city and getting another job. Now he's honed his skill and he does it again and again and again.”

To reach this reporter: wschertz@; 330-865-6148.
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