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EMPLOYEE FRAUD
CASE STUDIES OF TYPICAL SCAMS

OVERVIEW: EMPLOYEE FRAUD IS WIDESPREAD

Privately held businesses are especially exposed to employee fraud. Often the
issue is size; there simply aren’t enough employees to effectively divide
responsibilities and install appropriate checks and balances. Other times it is the
closeness of employees, their tenure and relationship with the owner that
encourages lax controls and oversight.

In every case, the issue is the same:

No employer was ever defrauded by an employee he or she didn’t trust.

Put plainly, and employee has to first have access to something worth stealing.
Without that access, there is no theft.

All employee fraud stems from three conditions, each or which is present in
every case.

Need (or motive): Between 10% and 15% of employees steal because
they want to. Their need is to prove they are smarter, or can get
something for nothing. Another 10% to 15% will never steal. Their need
to feel honest and good about themselves trumps any temptation. The
remaining 70% to 80% steal because they are pressed by outside
financial strains, or because they are seeking revenge, or sometimes just
because they can.

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 Opportunity: This is where my comment about “trust” comes in. There
are few cases where an employee takes something that will be
immediately noticed, although it sometimes happens. Most fraud occurs
where it won’t be easily missed, or at least not right away. Systems are
for keeping honest employees honest, by making it riskier for them to do
anything else.

Rationalization: This is different from motive. In most cases, an employee

under financial pressure thinks “I’ll put it back as soon as I get
financially stable again.”
It starts out as a “loan.” Other times it is an employee’s self-explanation
of what is “fair.” “She does less work than me and gets paid more.
That’s not fair.” Or “I should have gotten a bigger raise. That’s not fair.”
Sometimes the rationalization is that revenge is appropriate, but most
often it is a justification that the defrauded value was earned.

In a meeting of constants who specialize in working with business owners, we

discussed how many of our clients had experienced fraud. The general
consensus was between 65% and 75%. The more cynical of us said that the rest
had merely not discovered it.

Employee fraud is a common and recurring issue in the day to day running of
the business. Any employer who says “We don’t have people in our company
who would steal” is evidencing the highest form of arrogance- a belief that he
or she has the ability to unerringly see inside the soul of each new hire.

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What follows are 5 true examples of employee fraud, and a personal story.
There are hundreds more, but these may help you to understand how creative
and diligent people can be at doing things they shouldn’t.

These are true stories. Every one of them actually happened to a business
owner that we have worked with. They are not unusual occurrences. The
owners had decent systems in their businesses. They thought the checks and
balances in their companies worked.

Most importantly, each of the thieves

was a trusted employee. The examples
happen to be mostly female, simply
because the large majority of
administrative employees are female.
There are plenty of male thefts, but a lot
of those are from plants, trucks and
warehouses where the process and systems (and the opportunities!) are more
obvious.

The people you don’t trust are never given the opportunity to steal from you.
They are watched more carefully. Every one of these thieves is someone who
had the responsibility and the authority to do something that could divert
money into their own pockets.

Employee fraud occurs in every business. If you are lucky, it is limited to a few
highlighters for the kids or a six-pack of soda from the staff refrigerator. If you
are unlucky (or sloppy) it can be enough to put you out of business.

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CASES:

Case 1: At 6:30 one evening the owner of an engineering firm needs to check
on a paid invoice amount. He goes to the envelope containing cancelled checks
on the receptionist’s desk which he saw come in the mail that morning. In it, he
finds a check made out to his receptionist for several thousand dollars. He
recognizes his personal signature on the check.

Case 2: A hardware store owner purchases a new computer system. Despite

extensive training, his bookkeeper of 15 years cannot implement the software.
In tears, she finally resigns. Over the next two months, he finds that the
accounts receivable are overstated by $80,000.

Case 3: The owner of a technology company is surfing E-bay for some used
equipment. She finds two new computers for sale in her town that exactly
match two that she saw delivered for a customer’s order the previous day.
Subsequent investigation reveals over $300,000 in equipment sold on E-bay by
two employees.

Case 4: The owner of an industrial services company receives a call from a

collection agency regarding the past due balance on a credit card that the
company does not have.

Case 5: An administrative assistant in an advertising agency quits to start her

own business. When the owner gets the monthly statement from the office

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supply company, it includes thousands of dollars of computers, furniture and
supplies that were never delivered.

Case 1: What happened?

How did the owner’s signature get on the
check? The engineering firm created one
check each day to the city regulatory
authority for multiple permits and filings.
The expenditure was not assigned to
individual projects, and whomever was
going downtown to the office asked the receptionist to draw a check from
accounting for all the permits needed that day..

The receptionist analyzed and discovered the procedure then requisitioned

checks for a “typical” amount on days when no permits were actually needed.
She wrote the agency’s name in as payee using an erasable pen. She then
changed the payee to himself, deposited the check and intercepted the
cancelled checks so that she could change them back. This scheme was
complicated and easily discoverable, yet it still netted the employee over
$15,000 in just a few months.

Case 2: What happened?

The hardware store bookkeeper was “floating” receivables. She would deposit
collections from customers in an alternate account and then issue a check to
herself.

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The customers received statements showing that their bills were paid. Over the
years, the bookkeeper had developed a complex set of double books.

A more common version of the receivables scam is the phone vendor. The
A/R person will set up a dummy vendor, invoice the company and then pay
the bill.

Case 3: What happened?

The stolen computers were simply a matter of poor checking procedures.
Salespeople submitted purchase orders for customers’ equipment. The
technicians ordered and installed the equipment but it wasn’t checked against
the customers’ purchase orders.

This case had an added level of fraud. The bookkeeper had been engaged in
some minor receivable theft. When the head technician discovered it, he
blackmailed her cooperation in the much larger scheme.

Case 4: What happened?

This is a case of poor mail control. A new receptionist opened a credit card
offer. She filled it out with herself as the authorized company representative.
When it arrived, she immediately charged it to the limit. She destroyed the first
few statements. When the collection calls started coming in, she told the
collectors that “she” wasn’t in the office.
As the pressure increased, she quit without notice and moved out of the state.

Case 5: What happened?

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Sometimes you are lucky enough to get a very stupid thief. The misuse of the
company charge account showed up in writing within two weeks of the theft.
They employee’s signature was on the charge slips. The merchandise was
delivered to her new business and was clearly still in her possession.

So – an open and shut case that sent the employee to jail, right? Well, not
exactly.

The employee’s claim, according to her attorney, was that she couldn’t have
possibly been that stupid. The theft was so easily discovered, it must not have
actually been intended as a theft. She falsely claimed to have had a conversation
with the owner about using the account with an agreement to repay when the
bill came due. Her mother submitted a check for payment in full immediately.

Another thief walked away because it was simply too difficult, expensive and
time consuming for a business owner to deal with.

CATCHING A THIEF
What happens when you catch an employee stealing? In most cases, the
practical business owner is more concerned about recovering the money than
getting “justice.” They may file charges but negotiate with the defendant or an
attorney to drop charges in return for reimbursement. Frequently, they sign a
confidentiality agreement as part of the deal.

If you catch a thief, ask yourself whether cutting a deal is really participating in
a future theft. Did this employee steal before? We’ve seen thieves who have

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made two or three prior deals for confidentiality. When caught, they started
negotiating immediately, so that they could move on and steal again.

If you found that your thief had stolen before, how would you feel towards the
previous employer? We all share a responsibility to drive thieves from the
workplace.

Assemble your evidence and present it to the District Attorney. He or she will
tell you whether they will pursue the case. If not, consider civil litigation for
recovery. Remember, if you don’t take action, you cannot say that they
employee was terminated for theft. They could sue you for defamation.

In the cases above, charges were pressed against the bookkeeper who took
$80,000 in receivables. She served jail time. The bookkeeper who sold
computers on EBay was charged, and settled with a plea bargain and a
restitution schedule. The receptionist with the fraudulent credit card had
moved out of state, and got off Scott-free.

The receptionist who changed the recipient on the checks and then changed it
back?

She was an experienced thief. The owner made the mistake of confronting her
alone to avoid embarrassment. She immediately threatened to call the EEOC
and file charges, claiming that he had fondled her and demanded sexual favors
instead of repayment.

They settled on her immediate voluntary termination.

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CONSPIRACY
Each of the cases above involved a single
point of theft. Even the stolen computers
were dependent on one person; her cohort
was merely engaged in blackmail. But
sometimes you have a conspiracy to steal,
and that can be much more difficult to
discover.

I owned an auto parts warehouse. We delivered to scores of repair shops

around the city daily via a fleet of delivery vans. Salesmen called on the shop
owners, distributing special offers and premiums. Parts were pulled according
to written order, checked by a supervisor, and checked again by the driver, who
was responsible for shortages once the truck left on its route. I thought the
checks and balances worked.

I was wrong. The salesman would make a deal with a shop owner. The
salesman would communicate an “order” directly to the route driver for small
but expensive items, on the pretext of telling him about scheduling challenges
or even road construction. As the truck filled with parts the next day, the driver
would simply put a few more items on after the final check, while the
supervisor was engaged elsewhere in the warehouse. The shop owner would
pay the salesman a deeply discounted price in cash, and the salesman gave a
relatively small commission to the driver.

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While the salesman wasn’t, strictly speaking, needed as an intermediary, his role
was important. He screened the shops for likely partners in crime. He knew
which shops were serviced by specific routes and drivers, and could give the
owner warning when he had to “really” order needed parts because the driver
was on a different route that day.

The salesman’s communication role avoided having a driver approach owners

directly, which was far more dangerous. The products involved were always
items to be used immediately. Once installed, it was impossible to prove that
they were from our warehouse. The driver avoided the risk of being seen by a
customer or employee receiving money directly. The salesman never touched
the stolen merchandise.

Eventually the salesman made a mistake and approached an honest owner, who
tipped us off to what was happening. A quick check of the suspect truck just
before departure proved our case, but it was impossible to present evidence
against the salesman.

Because the parts were obviously not labeled for a delivery, we couldn’t identify
exactly who the complicit customers were.

We had talked to the police about setting up a sting, but we couldn’t tell them
which customers to watch. They were understandably unwilling to follow a
driver and the salesman around for days. We couldn’t even be sure if only one
driver was involved.

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Like most fraud conspiracies, this one involved an inside employee, an outside
employee, and willing recipients. Of course we fired the salesman and the
driver, and changed our check procedure to include an overall “last look” at
each truck before it was closed for departure. We saw the order frequency of a
few customers drop dramatically as soon as we acted, but we could only
suspect their involvement. A physical inventory count showed almost $100,000
missing in the previous few months.

The salesman had been out of work for a long time before we hired him, and
thanked me almost weekly for giving him a job. In meetings, he was the most
vocal about what a great company we were. The driver was one of our most
efficient, and drew regular compliments from many customers for his courtesy
and accuracy. We trusted them.

DEFENDING AGAINST FRAUD

What can you do to protect your business?

Of course, the best way to avoid the pain of employee fraud is to have systems
in place to prevent it. The first and easiest method for testing your systems is to
think like a thief yourself.

Spend a few hours putting yourself in each job in your company. Stand in the
work area and go through the motions of the job. If you were intent on
stealing, how would you do it? What would you take? Where would you hide it?

For a more professional look at your security, consider hiring a Certified Fraud
Examiner. They are specially trained to spot flaws in your systems.

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Above all, don’t make the mistake of ignoring invitations to theft because “My
employees will think I don’t trust them.” Trust is an important part of any
employment relationship, but it only takes one thief to risk everyone’s job
security.

What if you can’t assign check and balances?

Many small businesses have difficulty separating responsibilities. There are
simply not enough employees for a system of checks and balances. One
bookkeeper handles payables, receivables and reconciles the check book. In
these cases, the owner has to be the safety factor.

Have bank account statements sent to your home so that you get a first look at
all of the activity. Do the same with credit card statements. Always sign checks
personally. (On vacation? Two or three signed blank checks will usually cover
any emergency. But remember to reconcile them as soon as you return.)
Who opens your mail? If you can, open it yourself. If not, have it opened, but
placed on your desk for sorting and distribution.

Is watching the books enough?

Not all employee theft involves financial accounts. There is a lot of truth in the
old saying, “If your business has a door, you can be sure something stolen is
going out of it.”

Inventory leaves in clothing and purses, in trash and in delivery or service

vehicles. Office supplies, coffee and food are “fair game” because employees
think of these items as theirs anyway. Postage is a common form of petty theft.

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After all, “It’s only a stamp.” Employees punch in early or have a friend punch
them out late.

We know of one clerk who was given payroll figures to transmit for direct
deposit. One week she made an error entering in her own salary as $1,631.00
instead of $1,361.00. When the mistake went undiscovered, she made the same
“error” on the next 14 payrolls!

If you have inventory, whether product, food or raw materials, you are
particularly prone to theft. Much of this type of theft can be controlled by
simple checks. Don’t let employees park their cars near the back door. Lock
down the trash at night so that employees can’t return to fish out stolen goods
after hours. Check the list of transfers against an original. Have a log for
postage used. The simple threat of possible discovery will discourage most
casual thieves.

No business can completely protect against fraud. The small percentage of

practiced thieves and conspiracies involving vendors or customers are
particularly difficult to stop.

You have to trust someone, but appropriate checks and systems will make the
majority of folks who aren’t natural thieves stay in line. As my father said,
“Locks are only for honest men.”

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JOHN F. DINI

CONTACT INFORMATION

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