This is a story I hate to write, yet I’ve found myself doing so over and over throughout my 33-year career covering the construction industry. That’s because it keeps repeating itself.
The latest involved a West Coast distributor of industrial pipe, valves and fittings who I know very well and recently wrote about in an article for Supply House Times magazine, which I serve as editor. The business suffered a loss of $830,000 over a five-year period from a former controller who last fall pleaded guilty to embezzling from the company. He was sentenced to a prison term and restitution.
According to the business owner, “He was a hard worker, and people liked him.” The man’s performance seemed good for a long time, but eventually he got fired because the owner had continuing problems getting timely financial reports from the controller. “All we heard was computer problems and other excuses,” he told me. After the termination the company contracted with a financial expert to sort things out, and within a couple of days discovered a phony payroll scheme.
Ten years ago I wrote an article about a large mechanical contractor who got victimized to the tune of $1.9 million over an eight-year period by a bookkeeper with a gambling problem. The woman was prosecuted and convicted, but only after she had squandered most of the stolen money. The company was able to collect only a little back from her.
On another occasion I reported on a plumbing contractor who told me of attending the lavish wedding of a key employee’s daughter and wondering how the man could afford such extravagance. It was financed, he later learned, by his own coffers! I also recall a couple of small construction trade associations whose staff executives had gotten away with some financial hanky-panky due to lack of oversight from the volunteer board members.
Easy MarksCoincidentally, right around the time I visited the West Coast to cover my story on the pipe, valves and fittings distributor, I read an article in my local community newspaper about a neighborhood business successfully prosecuting a former bookkeeper who had stolen more than $600,000 from them to sustain a gambling habit. This shouldn’t come as a surprise. Small businesses and trade organizations in all industries are vulnerable to embezzlers who seek them out precisely because their proprietors tend to be inattentive to bookkeeping and are happy to hand over those duties.
One survey conducted several years ago of certified public accountants by the Institute of Internal Auditors (Auditors Inc.) found that as many as 40 percent of small businesses may suffer embezzlement losses, small or large. Another study I came across said that the average amount embezzled from small businesses was more than $127,000.
Exact data is hard to track, however, since many cases go unreported. The Auditors Inc. survey indicated that only 2 percent of victims report the crime. Most owners are too embarrassed to report it, and they worry it will destroy their credit rating or bonding capacity if word gets out. Prosecution can be costly and time-consuming and not worth the trouble if the amounts stolen are not huge. Most commonly, they simply fire the bookkeeper, who often goes on to do the same thing in another job.
In small companies, a single individual often has control over a company’s payables, receivables and payroll. Sometimes this person also has check-writing authority. This is an ideal setup from an embezzler’s point of view. It’s harder to get away with in larger organizations where bookkeeping and accounting get divided among numerous workers in large departments. Big companies have plenty of cross-checking, audits and division of responsibilities that make it hard for individuals to get away with embezzlement, and they also tend to do more extensive background checks before hiring someone. So embezzlers tend to seek employment with smaller, less sophisticated organizations.
Small construction firms are especially vulnerable, because so many companies are run by hands-on contractors with a lot of savvy in their craft but who pay little attention to office operations. Many are only too happy to delegate the bookkeeping chores to someone who is good with numbers and seems to enjoy dreary paperwork.
Most pilferage is on a fairly small scale, which makes it hard to detect. Typically, it involves phony invoices or siphoned payments of only a few hundred dollars or less. The amounts don’t raise many eyebrows, although the total adds up over time. Often, the employee rationalizes stealing from the company because he or she feels underpaid. It often begins with minor amounts, sometimes even with the intention of paying the company back. But as soon as employees realize they can get away with a little without getting caught, the tendency is to take more chances and bump up the amounts.
Embezzlers often have engaging personalities and ingratiate themselves into positions of trust with small business owners. Employers who get victimized by embezzlement often find it even more devastating emotionally than financially, because it almost always involves someone they trusted and were close to.
Rules to Live ByHere are some simple rules and procedures to protect your firm.
• Be especially diligent when hiring for positions that involve company finances. The distributor I wrote about leading off this article told me that he only did a cursory background check when hiring the convicted embezzler. All his job references checked out OK, but that’s easy enough for a crook to arrange. Or, it could be that he cheated his previous employers but was not discovered or didn’t turn shady until landing his latest job.
• Seek outside expertise for key positions involving company finances. In hiring a replacement controller, my distributor friend contracted with a search agency whose services included a systematic criminal background check along with drug and alcohol testing - all of which had been neglected in the previous controller hiring. The owner also worked with a labor attorney to develop questions to ask and hired a financial consultant to interview controller candidates. “That’s something important, bringing in an expert for the interview process,” he stressed. “I know pipe, valves and fittings and don’t need to hire an outsider when it comes to warehouse or sales positions. But I don’t know CFO stuff.” The financial expert was expensive but ultimately cost far less than $830,000, and the company’s new controller is working out fine.
• That distributor later found out the controller lied about a college degree he supposedly had. Lesson here: “You need to contact the college directly and have them send you the certificate and transcript.”
• Be wary of job applications and résumés that show frequent job changes, and be sure to ask for and check references thoroughly. Don’t make just one phone call for a background check. Call all former employers, whether they are cited as references or not.
• Don’t delegate check-signing and cash disbursement responsibilities. Even if you are a “hands-off” owner, give yourself the job of examining all canceled checks and bank statements, and make sure you understand what every check was for. If it’s too much work for you to handle, at least make sure that employees charged with writing or depositing checks are different than the ones who balance the checkbook.
• Keep an eye out for payments made to unfamiliar vendors. Find out who they are and what they’re getting paid for. Ask yourself if the amount and frequency of the payments seem reasonable.
• Have checks sent to a post office box rather than a mailing address, and limit access to the P.O. box.
• Make sure no one person handles transactions from beginning to end. For instance, separate money collection duties from accounts receivable, and purchasing from accounts payable. Monitor payroll records frequently.
• Personally investigate customer complaints about double billing, as well as slow collections and inventory shortages. They could be innocent mistakes, but they also could be warning signs of embezzlement.
• Check out employees who seem to live beyond their means. When the office manager drives a bigger car and has a fancier wardrobe than the owner, it should raise a red flag. (The distributor told me his crooked controller drove a fancy car, but covered those tracks by saying he came from a wealthy family.)
• Be especially wary of employees with a fondness for casinos, racetracks or sports betting.
• Pay attention to employees with financial and personal problems. Let them know you’re aware of their situation and offer to help if possible, but also keep them away from tempting opportunities.
• Workaholism is another warning sign. Embezzlers frequently work late and on weekends and are reluctant to take vacations out of fear that someone else may look at the books and discover their schemes. My distributor friend let on that one reason he kept the embezzler on board so long was that he seemed to be such a hard worker, often staying late well after everyone else in the office had gone home, and never took allotted vacation time.
One reason I hate writing these stories is because many of you employ office managers who’ve been working for you for years and may be as much a friend as an employee. I’m sure the vast majority of these people fully deserve the trust you place in them. It’s not my intention to instill paranoia and get all of you staring daggers at valued employees who are doing nothing wrong.
Yet, it’s useful to keep in mind something Ronald Reagan famously told Soviet Premier Gorbachev during nuclear arms negotiations: “Trust, but verify.”
Jim Olsztynski is editorial director of Plumbing & Mechanical and editor of Supply House Times magazines. He can be reached at 630-694-4006 or email@example.com.