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North Bay Business Journal

Monday, March 18, 2013, 6:55 am

Embezzlement: A serious issue too few take seriously

Range of experts urge organizations to adopt preventative practices

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    As investigators continue to aggressively pursue allegations of business embezzlement in Sonoma County, regional fraud experts warn that many North Bay companies and nonprofits still lack the basic internal practices needed to catch and prevent those crimes.

    While cases involve a variety of schemes along what Sonoma County District Attorney Jill Ravitch called a “continuum of sophistication,” sometimes simple controls are adequate to prevent theft, according to Ms. Ravitch and experts in accounting and finance. Financial oversight should be considered a standard business practice and implemented by organizations of all sizes in the North Bay and beyond, fraud prevention experts said.

    “Wherever there’s money, there’s vulnerability,” Ms. Ravitch said.

    The problem is not unique to the North Bay. Nearly half of U.S. companies with fewer than 100 employees lacked an anonymous tip line in 2011, considered the single most effective tool for discovering embezzlement and required for publicly traded companies, according a 2012 study of global fraud by the Association of Certified Fraud Examiners.

    Small organizations consistently lagged behind larger companies in preventative measures, and those cases also involved the largest median losses of $147,000, according to the trade certification group. Losses up to $1 million were reported in 20 percent of cases, and a typical organization loses 5 percent of its revenue annually to fraud, according to the report.

    Regional fraud experts said that those risks are particularly acute in the North Bay, a region known for its density of small businesses and nonprofits. In pursuit of efficiency at a time of slim margins, owners and managers often overextend the access of those with control of the organization’s accounts and essentially empower those employees to commit fraud.

    “When you put all your eggs in one basket, you better watch that basket,” said James Perez, partner at the accounting firm Pisenti & Brinker and accounting instructor at Sonoma State University.

    As in many of the recent cases prosecuted by the District Attorney’s Office, it can be months or even years before employers catch employees in the act of stealing company funds. Without continuing oversight, trusted employees can write checks to themselves on company accounts, set up false vendors and otherwise develop methods to siphon funds from their employer, according to regional experts.

    Thefts have added up to millions for Sonoma County organizations in recent years. In 2012, judges issued sentences for jail time and restitution in cases including a $1.19 million embezzlement from Petaluma’s Bibbero Systems, $700,000 from Santa Rosa’s Center for Spiritual Living, $398,000 from the Kid Street Learning Center, $390,000 from the Sonoma Golf Club and $125,000 from the Oakmont Golf Club. Prosecutors are also pursuing a number of new cases in 2013.

    “We’re not talking about $20,000 here. We’re talking about hundreds of thousands of dollars, and the potential failure of the business,” Mr. Perez said.

    Finding motive — ‘the fraud triangle’

    While the nature of each crime varies, individuals are frequently pushed to act by a convergence of personal circumstances, rationalization and opportunity that fraud experts refer to as “The Fraud Triangle.” Most of those individuals have no criminal record and good compensation, ostensibly at low-risk for criminal behavior, Ms. Ravitch said.

    Yet with sufficient access to company accounts and some sort of justification, sudden financial pressure can be enough to instigate criminal behavior that adds up to big losses over time, said Jim Petray, partner in the North Bay office of BPM, Accountants & Consultants

    “Generally, it’s a long-term and trusted employee,” he said. “That’s why, when these things happen, it cuts so deep.”

    Removing of any of those three components can ward off the motivation to commit fraud, experts said. Yet while many of the internal controls that diminish opportunity are relatively simple, like regular owner review of bank statements and payroll, many still fail to implement them, Mr. Petray said.

    “In my experience over 37 years, less than half of my clients take proactive measures in this department,” he said.

    Regardless of an organization’s level of preparedness, Mr. Petray advised owners and managers to watch for classic warning signs in their employees. Resistance to taking vacations could indicate a need to keep constant watch over the books, and many cases will manifest themselves in an employee living well beyond their means, he said.

    It was during a business manager’s Italian vacation that Sonoma Golf Club uncovered the embezzlement of $390,000 over two-and-a-half years, according to the District Attorney’s Office. What started as a red flag in payroll lead to the discovery that the 53-year-old business manager had been increasing her own pay rate without authorization and using company accounts to pay taxes and other expenses, according to the District Attorney.

    “We put people in these positions because we like them. But circumstances can change and create a motive,” Mr. Perez said.

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    Comments

    1 Comment

    1. March 22, 2013, 12:46 am

      by Jeff Mallan

      I read your article “Embezzlement: A serious issue too few take seriously” and your title is so very true. Many owners of small to almost mid-size companies “over-trust” their bookkeepers, accounting managers, office managers, or general managers with too much control over the company’s accounting and finance operations. These individuals/employees have basically been given total control over cash. Therefore, business owners must play an active role in their accounting and finance operations, performing oversight with periodic review of the books and financial records. Business owners must have a financial acumen of their company’s books.

      There are 5 elements of internal controls: (1) control environment; (2) risk assessment; (3) control activities; (4) information and communication; and (5) monitoring. It is “monitoring” in which business owners are failing at. And without proper monitoring by business owners, an embezzlement can go on as long as the company is in business. Some of the major embezzlements in California have lasted up to 9 years. So, regarding the Fraud Triangle, the only fraud factor that businesses have control over is “Opportunity”. Take that away and you take away the chance of fraud being committed, for the most part.

      In your article, Eric Miles provides some great preventive measures. Items I would add to his list are (1) background checks for new employees working in the accounting department, (2) changes in vendor information should be verified, and (3) routinely compare check payees with the payees on the cash disbursement journal. And I cannot reiterate enough that business owners must take an active role in monitoring the accounting operations.

      When it comes to nonprofits, many boards of directors do not understand the fiduciary responsibility they have over the nonprofit. Individuals want to volunteer and help out in the community by serving as a board director of the nonprofit. However, they don’t understand that they have a fiduciary duty for keep watch over what goes on in the nonprofit, including the accounting operations. Many nonprofits can’t afford a fully staffed accounting department. So when this is the case, the board of directors must be involved in oversight of the accounting operations. Otherwise, an embezzlement may happen under their watch; and the board could be held responsible for lack of their fiduciary duty.

      I also have compiled a list of embezzlements (over $100,000 each) in California that were reported in the news in 2011 and 2012. In 2012, there were 48 embezzlements that totaled over $45 million. This is an increase from 2011, in which there were 45 embezzlements that totaled almost $30 million. This, of course, does not include the embezzlements that are not reported in the news.

      I guess I just wrote an article.

      You can also check my website for my presentation on “Fraud…The Other ‘F’ Word”. I have been giving this presentation to business groups for over 3 years now. Just trying to do my part in fraud awareness and prevention.


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