Oh, just working late

When the economy worsens, embezzlers cash in on poor business practices
Jan R. Costello Contributing writer

No business, large or small, is safe from embezzlement. No one knows for sure the total cost to business because much of it is unreported. The National White Collar Crime Center, a federally funded, nonprofit corporation, says losses from employee theft range from $20 billion to $90 billion annually.

"Embezzlement is a problem that tends to become worse when economic conditions worsen," said Michael J. O'Leary, a former assistant U.S. attorney in charge of the fraud section in Atlanta and now vice president and general counsel of Smith & Carson, an intelligence and security firm in Atlanta.

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Embezzlement takes as many forms as there are creative employees. For example, according to the Georgia Attorney General's Office, Dianne F. Carter is serving a five-year sentence at Pulaski State Prison for pilfering $1.5 million from the state cafeteria cash registers at the James H. "Sloppy" Floyd Building. Somehow, she found a way to tamper with the computer records so that no one noticed the missing cash for years. And R. Wayne Nobles is serving a five-year sentence at the Clayton County Correctional Institution for stealing $300,000 worth of postage stamps. He requisitioned checks from his employer, the University of Georgia, to buy stamps, and traded them for cash or used them in his own business.

Other examples of internal theft: The bookkeeper in a medical practice of six physicians skimmed off cash from patients, doctoring the receipts and falsifying balances. She siphoned off $28,000 before the doctors noticed. An administrative assistant created a pool of fictitious vendors, invented invoices for services rendered and issued checks -- which she cashed, stealing $1 million over a three-year period. "White-collar crime has been on the increase for a long time," said Charles L. "Chuck" Owens, who worked for the FBI for 25 years, serving as the chief of the FBI's White Collar Crime Program from 1995 to 1998. He is now a senior executive with Ernst & Young LLP in the litigation advisory services practice.

"Our practice is certainly thriving," said Owens, who works with law firms handling fraud cases or with companies that are trying to root out fraud.

O'Leary finds that all sizes of companies are susceptible to embezzlement, but their vulnerabilities vary. Small companies tend not to have adequate systems of control. "An individual can be put into positions where there is relatively little oversight of activities," O'Leary said.

On the other hand, large companies have internal controls, but "there are so many transactions going on that it can facilitate the concealment of fraudulent transactions," O'Leary said.

"There have never been more situations and more opportunities for employees to embezzle from their companies," said Douglas A. Singleton, a partner with Waddell, Smith, Magoon & Freeman LLC in Roswell who specializes in fraud prevention and detection and litigation support. He is on the board of the Georgia chapter of Certified Fraud Examiners. Singleton says embezzlers usually have pressing financial needs -- often related to drug or gambling addiction, adultery or medical problems. The embezzler discovers a covert way to exploit the company. And the embezzler feels entitled to the company's money, to a self-proclaimed, secret pay raise.

Older embezzlers do the most harm. The Association of Certified Fraud Examiners reports that losses caused by those older than 60 are 27 times higher than losses caused by employees 25 and younger. What can be done? Certainly, there needs to be a system of checks and balances. Test it periodically. Invest in independent audits and thorough background checks of key employees.

It's also important for management "to set an appropriate example," Owens said. "As we well know, many senior corporate executives haven't done that, and that creates a climate where people are more inclined to take advantage of a situation."

Owens also recommends taking action against an embezzling employee as a deterrent. However, companies should investigate the matter discreetly, with professional help, if possible, so they protect the evidence and the individual's rights. Most employers learn about embezzlement from their employees, customers, vendors and anonymous sources. The second most common method of discovery is pure chance -- stumbling upon the evidence by accident.

Establishing a fraud hotline can cut losses by 50 percent. Audits and background checks also reduce fraud losses, according to the Association of Certified Fraud Examiners.

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