A cautionary tale

After uncovering a staffer's embezzlement scheme, Hale Glass officials offer tips to protect against fraud
Katy Devlin
December 7, 2010
RETAIL : FINANCE

Hale Glass' embezzlement experience

The accountant at Hale Glass used several methods to steal from the company. First, she created duplicate payroll checks. She had the company's approved signers each sign one check, saying that the designated signer had forgotten to sign. "The employee would deposit one check at the very beginning of the pay period, and the other at the very end of the month. That way, the checks, which had the same check number, would not appear on the same bank statement," Hale says. Then the employee began to forge checks. The third form of theft occurred through payroll tax manipulation. The employee had the company pay her federal payroll taxes, while not deducting any federal withholding from her paychecks.

The embezzlement stopped after the bank's fraud department identified an instance of check number duplication and notified the company. "The accountant overheard the phone call from the bank and resigned her position," Hobson says. However, it took more than a month for the company to learn about the theft, when officials began to reconcile bank statements. "We were unable to locate the payroll bank statements and emailed to ask where she might have kept those. That was the tip off," Hale says. "She called shortly after to confess to the entire situation." 

In May 2010, officials at Hale Glass Inc., a Placentia, Calif.-based commercial glass contractor, learned that an employee had been embezzling money from the company for almost a year. The employee, an accountant, had embezzled about $40,000 during a 9-month period. "This employee had worked for us for about two and a half years, and we had no reason not to trust her," says Gloria Hale, president. "If I was listening to this story last year, I would have said 'that would never happen to me. I have a trusted employee handling money.' But, you can't rely on trust alone. Use good accounting and business practices so there's no opportunity for this."

Since uncovering the embezzlement scheme, Hale Glass has made notable shifts in its business organization to protect itself in the future. "Every business can be subject to this type of theft. Small businesses are particularly vulnerable, because their accounting departments are smaller, and it's harder to divide duties. The more people who are involved, the less of a chance an employee has to keep this sort of activity a secret. ... In this economy, companies are even more at risk. People are more desperate, and they can be much more creative," Hale says.

Below are several tips from Hale Glass management to help companies protect themselves against embezzlement.

Establish separation of duties—checks and balances. Different employees in different offices should be in charge of printing checks, signing checks and reconciling bank statements. "The most important protection is separation of duties. Our accountant no longer has the ability to print checks. They do the reconciliation, but can't print checks, which is a major separation," Hale says.

Create business practices that protect your company. "For small companies, I think it's not about trust, it's about good business practices. In order to protect yourself, you can't always go with what your gut tells you," Hale says.

Identify vulnerabilities. Look at your processes and identify all the ways an employee could potentially steal from your company. "There is a multitude of ways to steal money from companies. Our employee stole using several methods. An employee could also, for example, create a DBA with the name of your glass company, and could endorse checks to their newly formed company without your knowledge. Or, for companies with check stock, an employee could steal checks out of the middle of the stack, and it could be a long time until you realized that checks were missing," Hale says.

Add protective measures. Once a company has identified their vulnerabilities, create protective measures to eliminate the threat to those weaknesses. "For example, we have eliminated the possibility of forgery by creating a stamp signature. Instead of having signers, every check must be stamped, and the stamp is kept in a secured area. Any check that comes in without the stamp signature has a stop on it," says Susan Hobson, operations manager.

Complete frequent audits. "We complete more frequent audits to determine any irregularities," Hale says. Managers can also use impromptu audits to uncover fraud.

Be aware of what's happening in the office. Periodically check in and audit each part of your business. "It's impractical to be involved in everything that's happening at your business, but it's important to be in touch and really supervising. Every once in awhile, walk around, look into things, ask questions," Hale says.

Investigate suspicions. "A couple things happened throughout this situation that made me think something wasn't quite right, and I needed to follow up. But, I ignored it, because I trusted our employee. ... Talk to employees and know what's going on," Hobson says.

Watch for warning signs. "I overheard discussions about her money problems," Hobson said. Hale added, "And in hindsight, she was living a pretty nice lifestyle, with a second home and lots of toys—boats and trucks. ... That should have raised alarms." 

It happens more often than you  might think

 

In June, the Association of Certified Fraud Examiners, Austin, Texas, an organization aimed at reducing business fraud and white collar crime, released its 2010 Report to the Nations on Occupational Fraud and Abuse. The report is based on data compiled from a study of 1,843 cases of occupational fraud that occurred worldwide between January 2008 and December 2009. About 60 percent of the cases in the study occurred in the United States, and of those, about 90 percent of the frauds involved asset misappropriation—largely embezzlement.

According to the report, small business are disproportionately affected by fraud. "In general, these organizations have far fewer controls in place to protect their resources from fraud and abuse. Managers and owners of small businesses should focus their control investments on the most cost-effective mechanisms, such as hotlines and setting an ethical tone for their employees, as well as those most likely to help prevent and detect the specific fraud schemes that pose the greatest risks to their businesses," according to the report.

Some notable findings include:

  • A typical organization loses 5 percent of its annual revenue to fraud
  • Median loss per fraud case is $160,000
  • Frauds continue a median of 18 months before detection
  • Forty percent of frauds were uncovered thanks to a tip
  • More than 80 percent of fraud cases were committed by individuals in accounting, operations, sales, executive/upper management, customer service or purchasing
  • Perpetrators often display warning signs—43 percent in the study were living beyond their means, and 36 percent were experiencing financial difficulties.

For more information on the report, visit www.acfe.com. 

Katy Devlin is senior editor for Glass Magazine. E-mail Katy at kdevlin@glass.org.