ATEC (The Executive Committee) member learned recently that his chief financial officer, perhaps with support from at least one other key employee, embezzled at least $600,000 from his company.
He discovered it when he realized that cash flow was seriously deteriorating in an otherwise healthy business sales environment.
At first glance, you might say, “How stupid can you be?” Unfortunately, in most corporate embezzlement situations, the crime has been successfully perpetuated because of clever cover-ups.
A few months ago, another TEC member found that his president had been selling unaccounted scrap inventory, over a period of several years, to an unknown third party. He maintained scrap levels to fit the industry standard, so no one suspected otherwise.
Tom Parker, a former FBI expert on this subject and a TEC resource, has seen white collar crime that is baffling at best. The problem, he says, is that in most cases, these criminals are trusted and, generally, long-term employees who are beyond reproach. So the issues I would like to address this month are prevention, discovery and the aftermath.
Prevention
Let’s begin with a point that should be redundantly obvious. Background checks on key employees are a must. The Internet provides many tools to make this relatively effortless. An employee whose resume includes facts that aren’t true – such as claiming to have a degree from a university that has no record of them, or claiming to have worked at a job that can’t be documented – is a huge red flag.
Credit checks are revealing. Three nationwide agencies – Equifax, Experian and Transunion – provide credit scores. They are considered reliable and again easily accessible via the Internet. Also, when creditors call a company asking how much a key employee is making, then learn that the employee inflated the salary, that’s a clue that there might be a problem.
Then there are the behavioral signs. These are the most pernicious: a new car that doesn’t fit the employee’s persona, a vacation destination that doesn’t seem to fit the type of place the employee would be expected to visit or a new home that’s a big step up from the last one. And so on.
When these clues are obvious, there’s a tendency to ignore them for the simple reason they are unexpected. “Oh, they must have come into an inheritance, won the lottery, etc.” But they are signals.
Prevention means that as a business owner or CEO, you can’t take anything for granted.
Discovery
This, of course, is the most disheartening and agonizing moment.
The discovery often happens because of a simple oversight by the perpetrator or an accounting review that can’t get the numbers to match. More often than not, it’s the sudden realization that the cash flow balances in the business simply don’t match the P&L statement. More sophisticated variants are discounted receivables, over-valued inventories, phony invoices or outsourcing payments, etc.
Regardless, with discovery, it’s imperative that the CEO or owner or board take immediate action. First, the discovery team, preferably the CEO, must have access to cash and assume check signing authorization. All company bank accounts, lock boxes, temporary depositories such as money market accounts and CDs must be similarly seized. Next, advise the bank or other credit institutions that a discovery plan is in place.
Contact the authorities at the outset of the process. Also, if the suspect or suspects have not been identified, consider hiring a private investigation firm that specializes in white collar crime.
Of utmost importance, only the discovery team should know about what you’re doing because it’s possible to actually catch the perpetuator(s) in the process of embezzling.
Depending on the situation, other discovery actions may include:
1. An immediate third-party audit of all company assets.
2. Seize and evaluate the hard drives of any suspected employee.
3. Void all company credit cards and reissue as required.
4. Use warrants to seize personal computers at the homes of any suspected employees.
5. Ditto for personal bank records of any suspected employee.
6. If there’s reasonable cause to implicate an employee, suspend them immediately pending the outcome of the investigation.
7. Look for logical co-conspirators outside the business such as vendors, customers and professional service providers.
The aftermath
I’ve heard this experience described as a total violation of personal trust and an abuse of personal confidence and executive privilege. Regardless of whether you can be reimbursed through insurance, which again varies depending upon the situation, nothing can replace the feeling of emotional betrayal by the perpetuators.
Emotions aside, the most important issues a company should address in the aftermath are:
• Reassuring customers that the business has dealt with the problem and is moving forward with no interruption in customary service.
• Reassuring employees that “brakes” have been put in place to prevent a similar incident.
• Reassuring creditors that all of the above has been accomplished.
• Finding a reason or cause to celebrate a company success like a new order, new customer or new employee program.
Most importantly, for at least the next year, the CEO needs to keep his or her hands on the throttle. Watch the cash, sign the checks, approve any expenses over $500, and closely match the balance sheet with the P&L statement. It’s a matter of discipline, and in most embezzlement cases, it’s the lack of discipline that got the company into trouble in the first place.
Until next month, may you have the checks in place (no pun intended) to prevent an unfortunate embezzlement.
