The Expert Podcast

We talk a lot about the most common types of cases that we get in our agency, and today we're going to talk about one of the least common types we get, which is corporate embezzlement. This occurs when somebody in a company steals money from the company, usually it's a bookkeeper or an accountant or somebody in a position of authority. Here's an example of that kind of a story from Nevada: the owner of a Henderson construction company was swindled out of half a million dollars by the bookkeeper, who was writing fake checks and creating fictitious companies with fake buildings. This is very common, and they did this for many years and still stole half a million dollars.

A couple of key takeaways: First of all, this person had a criminal record. They checked references but did not do a criminal background check. A few years earlier, the person had committed theft from another business, where they did basically the same thing, but on a smaller scale. They worked at this construction company for five years and went to every kid's birthday party, playing picnics, the whole nine yards.

Here's the thing we've talked about before: anytime we do a corporate fraud case, the person in the case—the criminal, the fraudster—is almost always the most trusted person in the company. In fact, many times, when the fraud is discovered and we present the findings to the business owner, the business owner doesn't believe it. They think, "It can't be them. That's the last person I would expect. Very trusted employee, long-time employee."

The second thing that happens is the biggest loss that the business owner is facing is not always the money. It's how do I replace that person? That person knows everything about my business—they have all the key passwords, they have the logins, they have all the information. So, the money lost is one thing, but replacing that person is going to be very difficult for the company. In this case, the company even said they almost went out of business. They may still go out of business. Half a million is a lot to lose for a company.

The other takeaway is that the schemes are almost always the same. When you have payroll, accounts payable, and other types of outgoing money, a bookkeeper or an accountant basically has control over your financial future. They can create ghost companies that sound like a vendor you might be paying money to, with a similar name, but the money is really going into their own bank account. There's also been schemes where someone has created a fake employee and just put them on payroll, and the money goes into their own account. Unless you cross-check and double-check every financial transaction, you're not going to know this.

Look, an honest bookkeeper or an honest employee is not going to mind if they're being checked out. If you check their work, you check their math, and you have your P&Ls audited by an outside accountant, if they're honest, they're not going to take offense to that. In fact, they'll be pleased that you're watching out for the financial interest of the company. If you have an accountant or bookkeeper who says, "Look, I don't want you looking at my stuff" or "Why don't you trust me?" that's a red flag. Because an honest employee is going to welcome that kind of scrutiny because they want to make sure they're doing it right, and another pair of eyes helps.

In this case, this could have been caught much earlier. Even if you didn't pick up the criminal record on the person, having your books audited once a year would help. Even if you randomly checked things—go into your bank statements and pull maybe five checks at random and just look at them. Have another employee, the business owner, or a manager go through checks and ask, "What did this go for? What's the invoice for this? Is this employee in what department?" Many of these schemes can be prevented before they happen.

There's also what we call the fraud triangle, where anybody at any time could end up being an embezzler. You might think, "Well, some people just don't do that." That's not true. Every single person in the world, I don't care if they're Mother Teresa, could be in a position where they would steal money if they fall into what we call the fraud triangle. It's like the Bermuda Triangle. If three things happen to that person, they will commit fraud.

One is that they have the opportunity and the ability to steal money. You might think, "Well, everybody in my company has that," but that's not true. Some people can steal some money but not all the money. Some people don't realize that they have the ability to steal money and they find out accidentally. We had a case a couple of years ago where an employee discovered accidentally that there was nobody watching over the corporate credit card. They had a corporate credit card to purchase office supplies, and they accidentally used it at a gas station to put gas in their car. They pulled the wrong car out of their wallet, and nobody ever picked up on it. Now, there's fraud triangle part one: they can do it.

Part two is that they have a need to do it. Most people don't think they would ever steal money from their employer until they have a serious financial event. Their kid gets sick, their husband gets cancer, they have some financial event, they're getting foreclosed on, they're getting evicted, and all of a sudden, they need money. They need ten thousand dollars fast, otherwise they'll have a serious problem—maybe a legal problem. Well, now they think, "I know my company has ten thousand dollars. They won't miss it. I'll pay it back." But it's still not enough to get them to do it.

The third leg of the fraud triangle is what's called justification. People in their mind will look for a reason why they're not really being the bad guy anymore. Maybe they were passed over for promotion. Maybe they feel like they're mistreated by management. Maybe they feel like they deserve it because of what they do for your company and they're not recognized enough. Once an employee or partner in a company has all three of those things, it's guaranteed they're going to embezzle. Now, it may not be anything more than a box of pencils or a stack of paper from the copy room, or it could be 500,000 dollars.

You want to eliminate all those steps by having things cross-controlled. Look, you can't control what financial stresses someone has in their life, so you can't eliminate number two. Number three, you can work on by having a good corporate culture, where people are being validated. The only thing you can really control is number one—somebody having the ability to do it—and that comes from having cross-controls. Even something as simple as having different people open the mail every day can help. If your bookkeeper opens all the mail, they can hide documents and records that would disclose their fraud. Maybe once a week, the owner opens the mail, or maybe another day a week, the office manager opens the mail. That way, you have something that will break the chain of fraud in your company.

Again, it's not a common thing. We get maybe two or three cases a month like this, while we get hundreds of cases in other areas—online scams, bitcoin scams, probate fraud, asset searches. Corporate embezzlement and company embezzlement aren't huge; it's not quite even one a week. But when it happens to a company, it can be devastating. The company could go out of business, and you lose a great employee. But you may be able to prevent it in the first place by short-circuiting those three legs of the fraud triangle.