By Blake DuBose and Mike DuBose
It’s all over the news: almost a half-million dollars is missing from the South Carolina Hospitality Association, most likely due to embezzlement. The scandal has raised many questions, like “How could that amount have disappeared without being noticed? How often do things like this happen?” The answer: more easily and more often than you’d think! According to FBI statistics, there are 726 pending fraud investigations from 2011, and the rate of such crimes has increased steadily since 2003.
South Carolina is no exception to this disturbing national trend. A former Allendale County Bank employee recently pled guilty to stealing $323,000 from the bank. She faces 30 years in prison for the embezzlement, and up to another 20 years for setting fire to the building in an attempt to hide her crime.
Despite these incidents, few business leaders realize the danger embezzlement poses to them. Many simply can’t believe that their employees would ever betray their trust. However, it can happen to you! Case in point: a colleague recently shared a true story about a well-paid bookkeeper who had worked many years for a local company. The bookkeeper was very spiritual, a good friend, a trusted counselor to many…and also a thief, covertly taking large amounts of money from the business to cover personal credit card bills. When the news broke, other employees were in a state of disbelief. However, when speaking about the incident with other business owners, we were amazed at the number of similar horror stories they shared. In most cases, the thefts went unreported and the embezzlers were simply fired or allowed to repay the money.
There are many motivations behind theft. People do it to pay debts, feed gambling or drug problems, satisfy greed, fund lifestyles of excess, or cover unexpected expenses. Some tell themselves that it is just a temporary loan or that the company deserves it for mistreating them. Others just love the thrill of getting away with something. To make matters worse, many embezzlers avoid suspicion because they hold positions of responsibility in their organizations.
In a 2010 global fraud study, the Association of Certified Fraud Examiners (ACFE) determined that a typical organization loses 5% of its annual revenue to fraud and theft. Most fraud went undiscovered for around 18 months, and the median amount loss was $160,000—a hefty amount, particularly for small businesses, who were disproportionately likely to suffer (30% of companies in the study had 100 or fewer employees).
As a defensive maneuver, consider insuring your business against embezzlement. Scott Moseley of Irmo Insurance Agency recommends liability and comprehensive insurance policies covering fraud, embezzlement, and theft (note: there is often a limit of $10,000 per incident). Financial officers can also be insured against fraud. According to Moseley, a $100,000 employee dishonesty bond will cost a business about $300 per year.
Of course, as the saying goes, “An ounce of prevention is worth a pound of cure.” Based on research and conversations with our CPA, Frank Thomas, we recommend the following strategies:
- Conduct thorough pre-employment background checks. This can reveal felons who might be tempted to repeat their crimes (although the ACFE study found that 85% of people who committed fraud had never been charged with it before).
- Use QuickBooks or another electronic financial tracking system. Discrepancies are harder to hide in computerized programs.
- Divide financial duties amongst multiple employees. For example, one person should deposit checks, another should submit invoices to customers, and another should pay the bills.
- Open and review monthly bank statements yourself. Business owners should also regularly scan checking accounts for any odd charges, suspicious checks, unusual payments, or out-of-the-ordinary deposits.
- Ensure that the payments the business receives match its billings. Differences may indicate that someone has opened another account with your company’s information and is using it to make deposits for personal use.
- Charge most business expenses to credit cards. Statements are easy to review for irregularities, and many cards offer hotel and airline reward points.
- Use backup. Two individuals should count and track petty cash, which is often the easiest and most tempting to steal. Also, require two signatures on checks above certain amounts.
- Solicit objective help. Periodically contract with independent external consultants to audit the business’ financial records.
- Foster open communication. Tips (especially from other employees) are the most common way that embezzlement is uncovered, according to the ACFE study.
- Know your employees. Show care for all staff and keep up with what is going on in their lives. Pay extra attention to those who are unhappy or in financial trouble.
- Accept that you can never completely trust anyone. Desperation drives people to do crazy things.
If, despite these precautions, embezzlement still occurs in your organization, you have several options:
- Report the crime to the authorities: Only do this if you are certain of the person’s guilt. Ideally, any criminal charges should be bolstered by a written confession (or one that was made in front of two witnesses). If you choose this route, a former prosecutor we spoke to recommended contacting the solicitor’s office directly. This option does have some drawbacks, including litigation hassles and negative repercussions on the embezzler’s family.
- Let the person make restitution: If the thief can repay you quickly, hire an attorney to draw up a formal loan note. (The solicitor counseled against long-term payments because they weaken your case if you must prosecute later.) You will need to acquire personal guarantees from the perpetrator and his or her spouse, like liens placed on their home. This option allows you to recoup your losses and for the perpetrator to avoid embarrassment; however, the chances of you ever seeing your money again are slim!
- File a claim with your insurance company: They will ask you for proof and will cover the amount paid out to you by prosecuting or making an agreement with the thief. Be aware that even if the money is recovered, your insurance premiums may rise.
Choose your path carefully, being sure to speak to a variety of spiritual leaders, lawyers, financial experts, law enforcement officers, and others who may be able to offer helpful advice.
The bottom line: Embezzlement is one of the most financially and emotionally devastating threats a business may face in its lifetime. Although there is no foolproof way to avoid everyone who may try to steal from you, proactively protecting your business can make it harder for them!
