Follow the Money

A recent rash of financial crimes begs the question: How can business protect themselves?

 

Embezzlement is a white collar crime so subtle, so refined, it could be almost called a “white glove crime,” in which the perpetrators are often women and almost always “trusted,” “well liked,” long-time employees who’ve been given sole responsibility for a company’s finances. There, working slowly over time, like termites under the floorboards, they do their damage undetected…sometimes for years.

In the past two years, local headlines have revealed a wide range of embezzlement cases in the North Bay, from a teen taking cash from a supermarket register to high-level employees taking millions. There was a Santa Rosa man jailed for embezzling $153,000 from his company; a former cashier accused of stealing $142,000 from G&G Supermarkets; a former Napa County payroll manager arrested for embezzling more than $1.5 million from the San Francisco Giants; a business manager for a Santa Rosa charter school arrested for embezzling $400,000 from the school; a former Sonoma Golf Club employee sentenced for embezzling $392,000 from the club; a Santa Rosa bookkeeper sentenced for embezzling $262,000 in two separate cases; a Petaluma bookkeeper accused of embezzling $1.5 million from a commercial real estate firm; and, possibly most shocking of all to Napa readers, the arrest of a well-known local political hopeful and senior wine company executive—who’s since fled the country—for embezzling $900,000 from his own company.

What’s going on?

Are we experiencing an embezzlement boom? Are people turning to embezzlement to make ends meet in a slowly recovering economy? Sonoma County District Attorney Jill Ravitch allows that the economic downturn may have had something to do with it, “but honestly, I’ve been in this business for 25 years, and embezzlement’s been around the whole time,” she says. “What we’ve been finding in some of these large-scale embezzlement cases is that people aren’t stealing money to put food on the table. It’s really just greed. It’s a crime of opportunity. It’s a betrayal of trust. And it’s unfortunate, but there are people in our community who will take advantage.”

Napa District Attorney Gary Lieberstein says embezzlement activities can run the gamut from a family business to a large corporation. “I recently came upon a case where someone was stealing the water fund from fellow employees. She would collect money for the office water and not pay the water bills, but pay her own bills instead.”

On a larger scale, he tells of a Napa Valley winery where the owner was here only part time (and the rest of the time in another country). He’d put a “trusted employee” in charge of keeping the books and taking care of the daily tasting room deposits—and while the owner was gone, this person was pocketing most of the cash. “When that employee eventually left,” says Lieberstein, “the new accountant started looking into things and said, ‘Wait a minute. This doesn’t look right!’”

His advice: “No matter how much you trust somebody, you don’t want the same person responsible for handling all the deposits, recording and auditing.”

Business losses to fraud—of which embezzlement is a particular type, where a person with authority misapplies funds to his or her own gain—are staggering. According to the Association of Certified Fraud Examiners (ACFE) Report to the Nation on Occupational Fraud and Abuse, global losses to fraud total $3.5 trillion annually, with 20 percent of cases suffering losses exceeding $1 million each.

On the whole, the report states, it takes at least 18 months to discover the fraud and employees of five years or more on the job tend to take the most. Of these, almost all perpetrators have a clean history. Last, but possibly most disturbing, the report states that collusion or the very frequent failure by businesses to report the crime triples the losses because embezzlers, if simply “let go,” move on to practice their craft elsewhere.

How do they do it? Embezzlers are clever. Their activities may include creating false or inflated invoices, creating fictitious employees or inflated hours, falsifying expense reimbursement, altering or stealing checks, making false register entries or undocumented refunds/disbursals and simply taking cash out of the register.

Embezzling is a serious crime, but the embezzlers, says Napa County defense attorney Jeffrey Hammond, “look pretty much like you and me. They lead law-abiding lives, typically have families, intact marriages and are generally pretty low key. They often fly under the radar.” With no evidence to the contrary, they just seem like regular folks.

A case in point

One such regular, “nice” person, is Charity Howder, a pleasant, professional, trusted serial embezzler in Santa Rosa, now serving a five-year, four-month sentence in California State Prison for stealing $262,000 from two former employers from 2005 through 2011.

Howder ran a bookkeeping business that served many clients throughout the county and was, as it seems to be in most cases, personable, good at her job and above suspicion. “She was very well-liked,” says Detective Joel Stemmer of the Petaluma Police Department, who was in charge of investigating the case. “She managed the record keeping of both companies—including software—the whole financial side of the business.”

With all that responsibility, in an atmosphere of trust and even friendship, she was steadily, quietly, filling her pockets with company money. She wasn’t a novice. Police moving deeper into the investigation found another of her victims, a local company from whom she was suspected to have stolen more than $100,000 since 2009. “So we had three businesses over several years to look through,” says Stemmer. “It was a time-consuming investigation.” And the damage she caused was extensive. “Her actions shut down one business, a tow company in Cotati,” he says, “and the other suffered some pretty big financial loss.”

The immediate question that comes to mind is whether or not her employers could have been warned away from her by a simple background check. Stemmer explains that a standard background check, even though she had a felony in her past, would have been clean, as she’d been arrested under her maiden name. Detectives could unearth the whole picture, but staffing agencies or employers, if they went so far to seek one, wouldn’t have been able to learn what they needed from a standard background check. Plus, often, the crimes aren’t on record because employers haven’t reported that they’ve been duped by an embezzler.

Why wouldn’t someone who’s suffered from embezzlement report it? The answers are complex and individual, but most revolve around the added insult and fear of bad publicity, which results in conflicting feelings when the truth is revealed. “A lot of times, the first meeting will be very emotional,” says Lieberstein. “Businesses, particularly large businesses, know that if they prosecute [embezzlement] there’ll be bad publicity. They may hope for restitution and feel that, if they prosecute, there’ll be less opportunity to get their money back.”

Ravitch laments that, “Many, many times, you’ll find businesses fail to report [embezzlement] because they’re afraid they’ll lose business as a result.” Embezzlement may be associated with bad business practices, “and bad business practices don’t reflect well when you’re trying to attract clients.” However, though just “cutting your losses” might make sense for an individual business, it does a disservice to other businesses because the guilty employee will likely repeat the behavior elsewhere.

“One of the things we’ve seen before,” says Lieberstein, “is that we’ll have someone we’re filing against [for embezzlement], and we and find they’ve done exactly the same thing to someone else. If the previous employer didn’t report it, the person hiring him or her has no idea of the history.” He describes one case where a person was on probation for embezzlement yet somehow got hired by a nonprofit in Sonoma County—then did it again. “The embezzler then ripped off the nonprofit for about $10,000 while they were on probation in our county!”

Psychology of embezzlement

Why would a person with a professional job, making a decent salary, risk a prison sentence and the ruination of a life to steal from their employer?

“I’m not a psychologist,” says Lieberstein, “but I’ve been doing this work for 28 years, and in the case of an embezzler, it could be a simple case of, ‘It was easy,’ ‘They’re on hard times,’ or ‘It was right there.’ My brother had his own business in Sonoma County for years, and he got embezzled for $50,000. The rationale of the person was that she should have been getting paid more, so she decided to give herself a raise.”

The practice of embezzlement, according to Hammond, typically starts out small. The employee, who, despite having a job, may be having money troubles, will typically take small amounts, intending to pay the money back. When there are no immediate repercussions, the thief becomes bolder and justifies the theft in their own mind. “More often than not, it becomes easier and easier because of lax oversight by the owners. The people who are doing this are generally highly trusted, have worked for the owner for a long time and have basically been given a debit card or ready access to a bank account.”

It becomes a practice that simply grows, unchecked, over time, he continues. “I had one case where a woman had been working for her employer for a long time until he said, ‘Hey, where’s my money?’” The employee admitted the theft and told him she thought she’d probably taken about $30,000. The investigation by both police and a forensic accountant revealed it was far more. “She paid restitution of $250,000 and his attorneys fees, too.”

In the case of Charity Howder, it came out during the investigation and sentencing that, not only had the business owners lost money, but employees had been let go as result of the impact of the thefts on the business. After Howder was sentenced, Ravitch said, “This defendant earned her prison sentence by stealing hundreds of thousands of dollars from those who placed her in positions of trust in their companies, with the tragic result that others were unable to keep their jobs.” Howder will do her time; her reputation, now public, will be destroyed; and she’ll come out still owing $300,000 worth of restitution to her former employers.

Catching the criminal

Unlike bank robbers, who speed off in getaway cars, embezzlers can happily work at their craft for years, undetected, before owners suspect anything is wrong. But when an owner or manager does suspect something is amiss, what should they do?

The first step is to call the police. “We recommend a business owner come in and make a report rather than involve themselves too much in trying to solve the case,” says Stemmer, “because their involvement might hinder our criminal investigation.”

And what happens when the police get involved? “You tell us what you suspect is occurring,” he says. “Bring us some sort of evidence, like financial records or bank statements. A lot of times, when it’s a really extensive embezzlement, we’ll recommend they hire a forensic accountant, who can come in with their very special knowledge and training. They can put together a report to show proof that the business is being embezzled.”

Forensic accountant Jeff Mallan, CPA, CFF, CFE, of Mallan & Associates, Inc. and founder of the North Bay Alliance of Certified Fraud Examiners, describes being called in on a case that he remembers to this day: “The owner of a business fired his controller for poor performance of his accounting duties.  Soon thereafter, the owner uncovered cash discrepancies between the tasting room cash register balances and the bank deposits. The ownerwanted to verify his suspicions and brought me in to investigate the financial records. I found multiple avenues where the controller had been embezzling money—taking cash from the tasting room, making cash payments to himself and his credit cards, and making additional payroll payments to himself. In addition, he’d manipulated the accounting system records so that the business owner wouldn’t see anything unusual.

“I was able to present the evidence in a preliminary draft report to the owner and the local detective assigned to this financial crime. The detective reported the findings to the District Attorney’s office and an arrest warrant was issued. Unfortunately, when they went out to arrest the controller at his home, he took his own life.” He pauses. “When I found out, I was shocked.”

That was in 2009, in Napa, Mallan says. “I quantified more than $600,000 that had been embezzled, and I said to myself, ‘Life is much more valuable than that. Why would someone want to take their life for stealing money?’”

To businesses that discover they’re victims of embezzlement, Mallan echoes the advice emphasized by law enforcement: For the sake of other businesses, report the embezzler. This will help prevent an embezzler from repeating their financial crime elsewhere. But just how to report the crime, he points out, presents the embezzled business owner with a choice: whether to take the case to civil court or criminal court. “Civil court is more expensive,” he says, “because you’re paying for forensic accounting services and an attorney’s service to attempt to get restitution.” If you go through criminal court and the outcome is “guilty,” the former employee receives a criminal record with jail time and possible financial restitution.

If that sounds harsh, Mallan is firm: “What I like to tell businesses is that, if you just fire the embezzler, that person will just get another job with another company and will likely embezzle from them,” he says. “And even if that next company does a background check, there’s no hope they’ll discover the applicant has been fired for embezzling unless a criminal offense shows up on the background check.”

So again, report the embezzler and let law enforcement take it from there.

Protect yourself

Above all, the parties interviewed for this article agree: Don’t put the fox in charge of the henhouse. Give no one person—no matter how trusted, no matter if you’re friends, no matter if you’ve known the person for years—sole control of the books. Install good business practices to help all employees maintain honest and accurate accounts. “It comes down to protecting yourself, being careful who you trust, conducting thorough backgrounds and making sure to the best of your ability the person you’re employing doesn’t have a criminal background,” says Detective Stemmer. “Also having a third person for oversight so there’s not 100 percent trust on any one person.”

“Watch out for red flags,” advises Mallan, “such as employees borrowing money from coworkers; employees with gambling debts or addiction problems; creditors showing up at work asking for a particular person; or an employee bragging about extravagant purchases they’re making or suddenly driving a luxurious car. Anything that makes you wonder, ‘On their salary, how could they be purchasing that?’ Or an employee who refuses to take vacations [possibly for fear of having their crime detected]. You’re looking for anything out of the ordinary that could indicate fraud.”

“I think all companies are at risk,” says Ravitch. “The most important thing to do is engage in good business practices. Put those controls in place and make sure you carry them out. And also, if something is catching your interest, engage in an independent audit to find out whether it’s an unfounded suspicion or indeed if it’s a pattern or a trend, so you can take action before it’s too late.”

 

Antifraud Programs and Controls

In August, the Napa District Attorney’s Office, together with Wells Fargo and Burr Pilger Mayer Accountants and Consultants, conducted a seminar about fraud prevention in Yountville, It was similar to one they held in Santa Rosa earlier this year, and the one they’re planning in Marin for early 2014. As part of the presentation, they offered detailed steps businesses should take to protect themselves from embezzlement and to keep employees safe from temptation. The list below, created by Burr Pilger Mayer Accountants and Consultants, delineates highly advisable, good business practice.

Internal Controls to Detect or Limit Fraud

• Audit of internal control over financial reporting (ICFR)

Source: Association of Ceritfied Fraud Examiners (www.acfe.com)

Steps to take