How to Fight Embezzlers

A $1 million embezzlement at Caliber Motors in Anaheim Hills, CA, stunned the local dealership community when it became public this past spring.

Sheryl Lynn Law, 46, and her sister-in-law, Jessica Louise Newark, 64, of Whittier, were arrested on suspicion of embezzling the funds during the more than 10 years that Law worked for the store as a contracts clerk in the financial department.

The Orange County District Attorney's Office alleged that Law wrote 144 fraudulent checks payable to Newark or her now-deceased husband. The infractions allegedly began on June 19, 2000 and lasted until August 13, 2007, with the two suspects splitting the money. Law also is accused of doctoring the dealership's financial records in an effort to conceal the thefts.

Of course, all businesses are vulnerable to internal attack. Nevertheless, having the crime occur in one's own industry makes it more relevant, more threatening and brings up questions about the measures dealers must take to protect themselves.

Security experts say no one should ease up in seeking to avert, or at least minimize, exposure to embezzlement.

Mike Osborne, director-global security for Toronto-based Kinross Gold Corporation, urges an anti-fraud program containing both proactive and reactive components.

On the proactive side, he lists employee awareness training and regular testing of systems, including comparison of employee addresses versus vendor addresses, bank account comparisons, and merchant codes on company credit cards.

If a fraud is discovered, he insists, it is vital to investigate promptly and thoroughly. If there is no internal audit department, he says, “Choose a competent and reliable firm to conduct the investigation. Not doing so will result in more heartache.”

Look for investigators with credentials such as certified fraud examiners, former financial fraud experience, and a good reputation in the industry, he says. “Prior to engaging the firm, ask for an investigative plan so you can see the logic and progression of the investigation.”

No question, expertise and experience have their place in any plan of defense, but some aspects come under the heading of plain common sense.

For example, Larry Richman, chairman and CEO of San Diego-based Heritage Security Services, a contract security guard services company, says, “My best advice would be to screen employees carefully for their credit background and attitudes toward drugs, alcohol and dishonesty.

“Generally speaking, people with high-risk attitudes and irresponsible paying habits tend to bring those behaviors to work with them, particularly addictions like drugs and gambling.

“They gravitate to like-minded co-workers and often create a culture of progressive permissiveness toward rule violations that contributes to crimes on the job.”

Richman also offers “a second rule of thumb — divide and conquer.” Generally speaking, he notes, if two employees share a given responsibility, such as handling cash receipts, it is less likely for both to collaborate in a theft than it is for a single person to give in to temptation.

What specific methods might be used to thwart an embezzler, or at least uncover him or her?

Vincent Ruocco, a partner at Anquillare, Ruocco, Traester and Company, of West Haven, CT, is a licensed CPA who has focused on internal control assessments, auditing, and asset protection for more than 35 years. He suggests that a policy of mandatory vacations and mandatory duty rotations should be routine for all businesses.

He says, “It is not uncommon for the embezzler to interfere with the customary workflow to effect the embezzlement. However, if your policies require the embezzler to give up control of his or her work, he or she will recognize that the fraudulent scheme might be more easily detected, and thus be detoured from committing the illegal act in the first place.”

Ruocco also recommends setting up a hotline for whistleblowers and training employees in how and when to use it. “While most hotline calls do not trigger fraud investigations,” he acknowledges, “one of the best ways to detect fraudulent activity is through other employees.”

Let employees know about the organization's ethics from the top down. Explain that any unethical conduct imposes costs on everyone. Employees who believe that they are being monitored are less likely to steal.

Of course, it's best that you not hire thieves in the first place.

“If you intend to place an individual in a position of trust, you should conduct a background check,” Ruocco says. The typical background check involves employment and education verifications, reference checks, criminal conviction checks, drug screenings and a credit check. You may need the candidate's consent prior to conducting some components of your background check, so you should seek the advice of a qualified attorney.”

To make certain that honest employees remain honest, the accountant advises conducting periodic surprise internal audits.

These are most effective after identifying high-risk areas. Simply knowing that an auditor may pop in at any moment can act as a deterrent to the would-be embezzler, Ruocco observes.

In the Caliber Motors case, the embezzlement was eventually discovered by a business manager, but not until considerable time had elapsed.

Watch for These Warning Signs

Experts agree that there are often telltale warning signs that internal fraud is occurring. Such as:

Do Hard Times Make More Crimes?

Does the reeling economy increase the likelihood of workers ripping off their employers? Sources for the accompanying article have varying answers to this question.

Mike Osborne says, “As the economy worsens and layoffs are announced, employees and suppliers will look for ways to personally benefit.” People experiencing increased financial pressures may develop a sense “they are owed.”

Taking a different view, Larry Richman says, “I'm not sure if a troubled economy is more important than a troubled employee coupled with a careless or overly informal employer. Certain things (such as security) should be treated as formally as possible, even among workplace ‘friends.’”

CPA Vincent Ruocco offers a middle-of-the-road response:

“Intuition tells me that there should be a correlation between the economy and embezzlement, but I could not point to a reliable scientific study that reaches a conclusion one way or the other,” he says.

He is not sure it matters one way or the other.

To prevent embezzlement, a dealer should focus on good cost-effective internal controls. A lack of those provides the would-be thief with an opportunity to steal. “

“With good internal controls, the economy should be irrelevant,” Ruocco says.

Author's Note: In the interest of full disclosure, Larry Richman, chairman and CEO of Heritage Security Services, and Alan Richman, the author of this article, are first cousins.