Back in 2011, a Colorado woman, who was a bookkeeper for a small Welding Supply company managed to embezzle more than $460,000 through forged checks over a 4-year period. Her actions led to the demise of the business and the bankruptcy of its founders, a mother-son team. The mother, who was planning on the business to generate her retirement, now lives 100% on Social Security.
The employee was a daughter of a respected friend, who came across very competent in her initial job interview. He completely trusted her and as the business was sinking, chalked up their financial struggles to the economy. He had no idea that most of his profits were being siphoned out the back end of his company. In expressing his disbelief, he lamented how she had sat straight across from him in a desk every morning. According to David Moorhead, of The Moorhead Law Group in Boulder, Colorado, this 2011 white collar crime case would have been a simple one to avoid, had the business owner, simply had some basic checks and balances in place for reviewing profit and loss statements.
Although it may seem counter-intuitive, most embezzlement in the United States, classified as a “white collar crime,” happens in small businesses. According to the 2016 Hiscox Embezzlement Study, four out of every victim organizations had fewer than 100 employees and just about half had fewer than 25 employees. 82% of all embezzlement cases took place in organizations with fewer than 150 employees. It seems that smaller organizations are particularly vulnerable because employees generally have more empowerment and higher trust.
So many of the embezzlement cases involve seemingly ordinary, yet trustworthy people, who turn out to be heartless criminals. The Hiscox study cites one case where a female bookkeeper in Maryland stole more than $1.3 million dollars from four different non-profits. The stolen money was slated to provide services for disadvantaged children and the homeless. The study points out that it is common for the most trusted and least suspected employees to carry out embezzlement. Sometimes these employees may fall on desperate times and having access to company funds start small and when they realize that no one in the company noticed, the theft cascades from there.
The Hiscox study references 4 of the largest cases by region. A Utah insurance agency owner, who stole $4 million, a controller at a manufacturer in the Midwest who stole $8.7 million, a controller of a Connecticut hedge fund who stole $9 million and a Texas bakery executive, who with his wife stole $16.7 million. These 4 cases alone, total $38.4 million dollars. These large losses are more rare, however, and the median loss is $294,354.
These facts and figures highlight the need for small to medium-size business owners to make sure that checks and balances are in place so that there aren’t any loopholes that can be exploited in this way. The study offers a few tips as to how companies can protect themselves.
- Implement Checks and Balances
- Watch for any major changes to employee lifestyles
- Promote trustworthiness and integrity in company culture
- Talk with employees about fraud detection and internal controls. Have them sign a code of ethics.
- Complete background and credit checks on employees who will be handling money.
- Review cancelled checks that come directly from the bank.
- Don’t assume employees with longer tenure aren’t capable of embezzlement.
- Don’t give end-to-end responsibilities for accounting to single employees.
These steps can help businesses stay on top of and notice this type of crime before it is too late. Remember, the person that may be stealing funds from your company could be sitting in the desk just across from you.