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As a fan of our local ECHL hockey team, the Rapid City Rush, I was sorry to learn recently that the team's new owners had uncovered evidence of some $500,000 worth of embezzlement over the past several years.
Others arrested or convicted of embezzlement in our area in 2019 have included a priest, an accountant for a nonprofit, a former chief of a volunteer fire department, and a former secretary of a tribal office. Amounts stolen ranged from $9,100 to $250,000.
Few things strike more fear and disbelief into the heart of an employer than learning a trusted employee has embezzled thousands of dollars. Employers who have gone through this tell me their feelings ranged from disbelief, violation, anger both at the employee and at themselves, sadness, and fear over the loss of capital and ensuing financial problems the embezzlement often causes.
According to the 2018 Hiscox Embezzlement Study, most instances of embezzlement are serious, long-term crimes. The average case lasted over two years, and the average loss was $357,650. The vast majority of cases involved more than one person. Nearly a third of employee-theft cases persisted for more than five years. The average loss for cases that continued for five years or more was $2.2 million and for cases lasting 10 years or more was $5.4 million.
The study found that there is no "typical" embezzler. However, it did find that the median age of embezzlers is 48, slightly more women than men commit this type of crime, and embezzlers' most common job functions are finance and accounting.
Embezzlers target organizations of all sizes and types. Four of the five local cases I cited were non-profits. Large organizations experience fewer instances of embezzlement than small and mid-sized organizations. According to the study, financial services continues to account for the highest number of cases of employee theft of any industry examined.
Many business owners, executive directors, and board members blame themselves for allowing theft to happen under their watch. But the warning signs are often subtle. Hiscox has identified five common characteristics:
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Intelligence and curiosity. Embezzlers are often eager to know how everything in the office works. Once they learn the processes, they manipulate them for their own gain.
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Extravagance. Watch for employees who are living a lifestyle that is out of proportion to their salary.
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Egotistical risk-taking. Embezzlers often break rules, from traffic laws to company policies to social norms, both at work and in their personal lives.
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Diligence and ambition. Embezzlers may work long hours or refuse to take time off– not out of dedication to the job but in an attempt to avoid being caught.
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Disgruntlement. Employees who feel they are being treated unfairly may be tempted to get even by stealing.
In my experience, most people are honest and trustworthy. But there are some whose past trauma contributes to a pattern of poor financial decisions and behaviors. Embezzlement, which to some degree is a crime of opportunity, might even seem to be a way to avoid the consequences of previous poor money choices.
The study noted that more than half of the organizations recovered less than a third of what was taken. It also pointed out that embezzlement costs companies far more than money. Business partners may be lost. The damage to an organization's reputation results in lost customers or donors and difficulty attracting new ones. It can take years to recover. Yet three-quarters of respondents said their current employers did not have insurance to cover embezzlement losses.
Embezzlement is a serious crime with serious consequences.
A cautionary tale
KFG operations manager Beth Kangootui shared with me the following story about her prior work experience:
"Our accountant is leaving and we think you have the ability to learn bookkeeping. Do you want the job? This question began one of the greatest, yet most difficult, lessons I would ever learn.
At age 19, with no college degree or accounting experience, I took over the bookkeeping at a travel agency. As I learned to reconcile transactions and balance the books, I noticed that some of the reports from a certain department were not adding up. In my innocence and inexperience, I began to question what I found. Within a few months, I had uncovered nearly $50,000 worth of outgoing transactions that were not coming back as income. The travel agency often fronted the money for airline tickets and allowed customers to pay for them over time. I found many tickets being purchased but never being paid for.
All the reports, unpaid tickets, and missing money traced back to one person. She was over 30 years my senior, the kindest, loving, most generous person I had ever met. She didn’t have the face of a criminal. Could she really be a thief? I remember shaking as I asked her to step into the other room and close the door. I confronted her. I watched in disbelief as she began to weep and tell me what she had done.
She was fired immediately. I still remember watching her collect her things as tears rolled down her face. I was numb, sad, and afraid. This felt like the hardest moment I had ever faced in my life.
The following weeks were even harder. I poured over reports, transactions, and client interactions to compile a book the size of several encyclopedias full of evidence reflecting fraud, and embezzlement of over $150,000. I was in tears as I handed this to the sheriff.
This experience showed me a dark side to people and business that I had never imagined. I was angry that she had put me in this place. I was sad that she had chosen this path. Most of all, my trust was shattered. I no longer believed I should trust anyone with financial matters in business ever again.
How to protect against embezzlement
How can businesses protect themselves and their employees from experiences like this? Here are some suggestions:
- Hire an outside CPA.
Either outsource your bookkeeping fully to a qualified CPA company or hire one to perform an annual audit of company books. An outside look always gives good perspective.
- Be careful with cash.
Have strict procedures for handling cash, including at least two people accepting and counting it. Better yet, use innovations in technology like internet payments and phone apps for processing credit cards. These allow even very small businesses to limit cash transactions.
- Run background and credit checks.
When hiring anyone in a role dealing with finance, background checks and references must be checked and double checked. Credit checks on candidates can also give insight on how they handle their own finances.
- Apply accounting checks and balances.
Create – and enforce – strict procedures about how things like cash, credit card numbers, check and bank account information are used and stored. Separate bookkeeping and check signing functions; no one person should ever have access to both ends of the transaction. With thorough procedures, it can become nearly impossible for theft and fraud to take place undetected.
Finally, accept your responsibility as a business owner or manager to protect your organization. Pay attention to details and financial operations. Set an example of integrity, reinforced with procedures to support employees in following that example.
Rick Kahler, MSFP, ChFC, CFP®, CCIM, is president of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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