Self Employed Web

Dirty Deeds

Posted on Saturday, January 4th, 2003 by

Dirty Deeds

Business partners Janet Hawn and Roger Nielsen
(Photo by Per Breiehagen

These days, theft and fraud know no bounds—even in companies with small staffs. If you think your business is immune, think again. We give you a primer on how to protect your business from the devastating impact of felony. Even on the Internet.

After weeks of fruitless searching for a bookkeeper/receptionist for their picture-framing shop in St. Paul, Minn., business partners Janet Hawn and Roger Nielsen couldn’t believe their luck when Nancy Cobb [not her real name] walked through their door.

None of the other applicants for the job measured up. Either they were strong in bookkeeping but lacked customer relations skills, or they were good with customers but had no experience managing the books.

Then in April 1998, Cobb blew into the shop. The divorced mother of a terminally ill teen-age daughter, she was articulate, charming and had glowing recommendations from previous employers that quickly convinced the business partners they’d struck gold. “She appeared to be everything we were looking for,” says Hawn.

Cobb was good, all right. Good at bilking her employers—and just about anyone else she came across—out of their hard-earned money. Unfortunately, it took two years and the near collapse of their business for Hawn and Nielsen to figure that out. Over an 18-month period, Cobb embezzled roughly $200,000 from Master Framers. In December 2001, she was sentenced to three years’ probation and ordered to pay $123,295 in restitution.

We asked Washington, D.C.–based accounting firm Beers and Cutler (www.beers for quick tips to prevent fraud:
• Make sure every bill has a purchase order, which is signed by the person who authorized the purchase.• Limit the number of people who can authorize purchases, and establish the amount.• Maintain control over the stock of blank checks.• Always use sequentially numbered checks, and review numbers to see that none are missing.• Sign all of the checks yourself unless you authorize someone to sign them.

• If you’re signing a check to an unfamiliar company, call the company to make sure that it’s real.

• Have statements sent to your home. This allows you to review the statements for any irregularities before anyone in the office sees them.

• Make sure that someone other than the person keeping the books reconciles the bank accounts.

• Conduct occasional surprise counts of petty cash.

• To improve controls over cash, have someone other than the bookkeeper open the mail and prepare the deposit slip. A copy of the deposit slip should be kept and compared to the records.

• Periodically review the payroll register for accuracy of wage rates and hours worked and to check that no fictitious or terminated employees are included.

In the end, the business owners discovered that nearly everything about their employee was a fantasy. Cobb had a string of nationwide arrests and convictions for theft, forgery and other crimes stretching back to her teens. She might have continued to steal from Master Framers, but authorities walked into the shop one day to charge her with an unrelated drug-related offense. The owners then learned of Cobb’s checkered past and began looking into their own books. That’s when the nightmare began

“When something like this happens, you never get over it,” says Hawn. “We were doing really well, and it hit our business hard. The money we can recover over time, but we can’t recover our sense of trust.”

If you believe that a felony committed by an insider couldn’t happen at your company, thousands of business owners nationwide would beg to differ. Once upon a time, they thought the same thing. For reasons that range from loose company security to the dissolution of business and personal ethics, fraud is on the rise. Fortunately, business owners can do something about it—from recognizing the warning signs to better securing their assets.

With more than 20 years’ experience as a business fraud investigator, Jim Baker has seen just about every form of theft, swindle, fraud and embezzlement committed against employers. But he thinks what is happening in workplaces now is especially disturbing.

Fraud is becoming more prevalent, Baker believes, because the societal and cultural conditions that once formed a natural layer of trust between employers and employees are breaking down. Now, he says, the only shame associated with fraud in the workplace is the shame of getting caught.

“Clearly, something is broken in the system,” says the former Dallas homicide detective turned owner of a fraud investigation firm. “What kind of an example are Enron, WorldCom and the other corporate scandals setting for society?”

Baker’s sense of what’s going on in the workplace is more than just a feeling. In one of the largest studies ever conducted on the problem, the Association of Certified Fraud Examiners, or ACFE (, determined that fraud cost the U.S. economy about $600 billion in 2001. Small businesses, which are the most vulnerable to attack, will be the hardest hit. In its 2002 “Report to the Nation,” the association found that the average fraud scheme in a small business will result in $127,500 in losses. That compares with $97,000 in losses for the average scheme committed against a large company.

John Warren, associate general counsel for ACFE, says small businesses are more vulnerable to fraud because they typically lack the secondary controls and procedures that are in place at larger corporations. In a smaller business, it’s not uncommon for one person to be in charge of a certain function—such as writing checks—with no oversight. The business owner is usually too busy to check up on employees, and owners often feel they don’t need to question the honesty or loyalty of their staff.

“When you’re in a small business where people know each other really well, there’s a built-in level of trust,” Warren says. “Business owners often like to say that their employees are like family. But that just creates more opportunity for fraud.”

We asked Washington, D.C.–based accounting firm Beers and Cutler (www.beers for quick tips to prevent fraud:
The most common types of fraud committed against small businesses fall into five categories:Skimming: This is most commonly committed in retail or restaurant settings, where a clerk will make a sale but fail to record it, and simply pocket the cash.Fraudulent disbursements: This typically involves payments made against false invoices. Jim Baker, a fraud investigator based in Dallas, recalls being called in to investigate a dental practice, which discovered that it was paying thousands of dollars a month for gravel. It turned out the office manager’s husband operated a gravel business.Checkbook fraud: This typically occurs when an employee has sole control of the company’s checkbook, with no oversight.Payroll fraud: This often involves filing for fake overtime. In another investigation, Baker was called in to find out why a school bus company was paying its drivers more than twice their yearly wages in overtime. “I knew there was trouble when I arrived at the company and saw 60 new pickup trucks sitting in the parking lot,” he says. It turned out the drivers were filing for fake overtime and paying their supervisor a cut for his participation in the scheme.

Inventory fraud: While it may be as simple as pens and paper walking out the door, small businesses often lose thousands of dollars a year in missing parts, machinery and sales merchandise.


Fraudsters can catch even companies that should know better. A Washington, D.C., law firm recently began to suspect that its bookkeeper was siphoning funds from the company account. An investigation showed that the woman, who had been given control of the company checkbook after demonstrating exemplary service, was writing checks to cover her personal expenses.

A private investigator found that several other companies had fired the bookkeeper for the same reason, but her previous employers decided not to prosecute her. “It demonstrates the importance of following through with prosecutions,” says Warren. “When you catch someone, he or she has to be punished.”

The Fraud Triangle

In looking at how employees commit fraud, Warren says to take a step back and consider the factors that lead to fraud. In the 1940s, renowned criminologist Donald R. Cressey developed what has become one of the most widely respected theories on the conditions that lead to workplace fraud. His so-called fraud triangle consists of several key elements.

The first is opportunity. For an employee to even consider fraud, the opportunity must be there to commit a fraud—and perhaps more important, believe he or she can get away with it.

Cressey’s second factor is a financial problem that is non-shareable. Employees can run into financial difficulties through no fault of their own or for reasons such as a gambling addiction. The bottom line is that the employee has a need that he can’t meet within his own financial means. (Of course, you can’t overlook simple greed, either.)

The third factor is the ability to rationalize the fraud. “They have to be able to convince themselves that what they’re doing is ethical and not illegal,” Warren says. “The amazing thing about people caught committing fraud is that few of them believe they were doing anything wrong. They often say, ‘Everyone else was doing it, and I was just getting my share,’ or ‘I’ve been here for 10 years without a promotion, and I deserved it.’ They have some way of rationalizing what they’ve done.”

Surprisingly, employees caught committing fraud are often the ones least suspected. While not always the case, they often work long hours, come in on weekends and will skip vacations. The reason is simple. It takes work to cover up fraud. They may work on weekends to maintain a second book and will skip vacations because they’re afraid that their replacement will discover what has been going on.

Take Control

What can you do? The first and easiest step a business owner can take is to keep control of the checkbook. Write and reconcile all checks yourself. If the business is too big, have one employee write the checks and have another reconcile the accounts.

The second thing to do is establish a clear separation of duties in the business. This ensures that several employees would have to collude before a fraud can be committed, and the odds against this happening are much greater.

Another possible option is to bring in an auditor. Warren says this can be a difficult step for many business owners to take because of the impact it can have on employees. After all, most employees don’t want to think they’re being investigated. Warren says the business owner must simply bite the bullet. Tell employees that from time to time an auditor will be brought in to audit the books, with no warning. And don’t make the threat—do it. If they ask why, tell them that it’s smart business. If you need to blame someone, say that the Association of Certified Fraud Examiners recommends it as a standard business practice.

“Be honest: Say you don’t suspect fraud, but these are the types of steps any small business needs to do to protect its operation,” says Warren. “If employees become overly upset or take offense—that’s usually a good warning sign.”

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