Aug 02, 2011
by SCOTT HAYS of Central Oregon Community College
I’ve written articles previously on embezzlement for Cascade Business News including “Internal Controls Help Reduce Embezzlement” and “Embezzlement is Personal.” One of the underlying messages in these articles is that embezzlement can destroy a business. What I was recently reminded of was its devastating and long lasting effects on the business owner.
Last week I received a call from a business owner who had just been the victim of a huge embezzlement case. Let’s call him Rick. He told me that he had found one of my articles on the web and called to share his experience. Most importantly, he wanted me to share his story with others as he does not want this to happen to someone else. So here is my best attempt to highlight some of the more pertinent points of his unfortunate experience.
The story began approximately three years ago when his small business was beginning to experience rapid growth. That was the good news. The bad news was that his business did not yet have an adequate accounting system in place. He shared this dilemma with a very close and personal friend - let’s call her Deb - who offered to organize the financial aspects of his business. Soon thereafter she became his trusted bookkeeper and financial advisor. Now he could focus on what he did best – serving his customers.
Rick kept very busy growing his business and Deb kept busy maintaining the accounting records. One day Deb reported to Rick that the company’s cash balance was very low. Rick asked what he should do and she advised that the company increase its bank line of credit. He followed her advice. Months later, Deb reported to Rick that the company was again experiencing cash shortages and she advised him to borrow against his home as the line of credit was now maxed out. When he asked her why his seemingly profitable company needed more cash, she explained that this is a typical cash flow pattern for a company in this “growth” phase. Trusting that this was a reasonable explanation, he again followed her advice. Based on the work he was bringing in, he felt that surely it was only a matter of time before this cash crisis would end. But soon Deb was again reporting to Rick that even more cash was needed and this time advised him to liquidate his 401k retirement accounts. Rick’s primary concern was the success of his company and had confidence in both its future and its financial advisor and so followed Deb’s advice once again.
Eventually, the persistent requests for more cash caused Rick to question Deb’s accounting and cash management practices. So he decided to look at the accounting records himself and soon discovered that she was stealing from him. Her embezzlement scheme included forging checks made payable to a fictitious company she had created. Deb has now been indicted on embezzlement charges and Rick’s total loss will likely exceed one-half million dollars. His losses include his business, his home, his retirement nest-egg, and his credit which prevents him from starting a new business. Needless to say, Rick is devastated. He told me he was very depressed as well as both financially and emotionally ruined. He said he feels very alone as even his bank and CPA are not helping as much as he’d like in the embezzlement investigation. To add insult to injury, Deb is actually collecting on unemployment while Rick’s requests for benefits have been denied.
It is Rick’s (and my) hope that reading this article will encourage business owners to be closely involved in the financial aspects of their business, ensure that proper internal controls are maintained, and avoid Rick’s fate. As I mentioned in a previous article, there are many great guidebooks on ways to reduce the chance of embezzlement in your company. The one that I often refer to is Policies & Procedures to Prevent Fraud and Embezzlement by Edward J. McMillan, CPA. Get a guidebook, read it, and become proactive against this persistent threat. Most of all, don’t be overly trusting, no matter how well you THINK you know your employee.
Scott Hays is Associate Professor of Accounting at Central Oregon Community College