In tough economy, employee theft climbs to ‘epidemic proportions,’ experts say

By: Laylan Copelin
Evidence against a young bookkeeper was in the photos she brought to work: her frequent Vegas trips, the $1,000 exotic puppy and $18,000 in house renovations.

She didn’t need photographic proof of her sudden breast augmentation surgery.

All on a $20,000 annual salary.

Finally, her boss became suspicious when she bought a Mercedes — with cash.

“This woman did everything but come to work with a sign on her back saying, ‘I’m stealing your money,’u2009” said James Ratley, president and CEO of the Association of Certified Fraud Examiners, an Austin-based organization with more than 50,000 members worldwide.

Not every dishonest employee, of course, flaunts his or her clandestine wealth as much as the young bookkeeper. Ratley said fraud by employees is more widespread than employers realize.

It is difficult to gauge the losses, but a 2010 survey of fraud examiners estimates that businesses lose as much as 5 percent of their revenues to various forms of fraud by employees, from bookkeepers to CEOs. A 2010 survey by the National Retail Federation put employee fraud ahead of shoplifting as the primary cause for retailers’ losses.

“Fraud has grown to epidemic proportions,” Ratley said. “It is so pervasive, it can no longer be ignored.”

Ratley doesn’t have to search his files for examples.

Consider just a few of the frauds that made news in Austin: A couple discovers that their bookkeeper of three decades has stolen $1 million from them when they go to sell their company and retire. A banker underwrites his NASCAR racing team with almost $1 million in phony loans to friends and relatives. A national charity employee steals almost $600,000 by inflating invoices for cellphones and selling the devices on the Internet.

But headlines are the exception, not the rule, for fraud by employees.

Fraud a ‘loss leader’

Ratley said occupational fraud is difficult to prosecute because the risk of punishment is low and managers — concerned about the company’s image or their incompetence in preventing the fraud — often prefer to deal with the crime quietly.

Fraud is a problem for businesses of all sizes, but firms with fewer than 100 employees are twice as likely to be victimized, according to the fraud examiners’ survey.

“Fraud is a loss leader for a lot of small companies,” said Bob Stocker, a founder of Bookkeeping Express, a national company with 33 franchises, including one in Austin.

Too often small firms have the same person writing checks, doing the billing and reconciling the books each month.

The owner is focused on sales or managing the staff or, in the case of a professional, practicing law or medicine, without focusing on the books.

“Doctors, dentists and lawyers make excellent fraud victims,” Ratley said.

If the firm is large enough, the duties of writing checks, billing and reconciling the books should be split among employees, experts say.

If that’s not practical, an outside bookkeeper can be hired to reconcile the books each month.

“It’s not that expensive,” Stocker said. “It takes us a couple of hours , maybe $200 a month.”

At a minimum, Stocker said, credit card and bank statements, preferably with check images, should be sent unopened to the owner, not an employee.

“And really look at them,” Stocker said. “Any credit charges they don’t recognize, call the credit card company and get the backup information.”

Audits aren’t enough

Ratley said an employer shouldn’t assume that the company’s annual audit protects the firm from fraud.

Audits, he said, are just a sampling of a company’s finances to give a picture of the firm’s financial health, not a thorough search for fraud.

“Audits only uncover 13 percent of frauds,” Ratley said.

Tipsters, whether co-workers, vendors or competitors, expose 40 percent of the frauds, according to the fraud examiners’ report.

For that reason, Ratley recommends a hotline for reporting suspicious activity.

Who steals from an employer?

“Most fraud perpetrators are trusted and well-liked,” Ratley said. “The more trust an owner puts in their employees, the greater the opportunity for them to cross the line.”

A picture of perpetrators emerges from the survey of fraud examiners and Ratley’s interviews of suspects.

“Bad people are supposed to look a certain way,” Ratley said. “They don’t.”

Most of them had never stolen before from their employer. Their stories usually share three traits: opportunity, financial need and the ability to rationalize.

Among the common rationalizations: “I’m just borrowing this money. I’ve worked here a long time. They passed over me for a promotion. The company doesn’t care about me.”

In some instances, the employee may repay the money the first couple of times they steal it. Eventually, they become accustomed to the extra cash and can’t stop.

“People don’t intend to steal as much as they did,” Ratley said. “They usually don’t even know how much they stole.”

And they are surprised when they get caught.

“Most of them get caught, Stocker said. “The question is, how long they get to do it.”

According to the survey of fraud examiners, schemes last a median of 18 months and the median loss is $160,000. But nearly a fourth of the frauds involved losses approaching $1 million.

Bad times expose fraud

A sluggish economy exposes many schemes.

“When the economy is good, there is more money flowing. You’ve got more business coming in, so you are more likely to hand off the bookkeeping,” Stocker said. “There’s more money in the checking account. Your costs are going up with revenue, so you don’t notice the higher (fraud) costs.”

When money gets tight, however, it becomes harder to conceal the fraud.

Once the fraud is exposed, the issue becomes trying to recoup the losses.

“Catching them is one thing,” Stocker said. “Getting your money back is another.”

Ratley agrees.

In some instances, the dishonest employee has bought houses or cars or boats that can be sold. Often, there is little to show for the crime.

“People do not steal money to save it,” Ratley said. “They steal it to replace money already spent.”; 445-3617


Tips for preventing or detecting occupational fraud

Separate bookkeeping, billing and account reconciliation functions.

Company ownersshould receive bank and credit card statements.

Establisha hotline for receiving tips of suspicious activity.

Educateemployees on the cost of fraud to the company.

Encourageco-workers to report fraud.

Createa climate of honesty and integrity.

Usecontinuous auditing software.

Rotatesensitive jobs.

Usebackground checks in hiring.

Source: Association of Certified Fraud Examiners/