Biggest thieves are on your payroll

LAS VEGAS — How can contractors find out if one of their employees is stealing? By getting lucky, mostly. Tipsters reveal 40% of fraud and theft, Cleveland, Ohio-based CPA Michael Bohinc told contractors.

Half of those tips come from other employees, Bohinc told contractors attending the Plumbing-Heating-Cooling Contractors – National Association Connect 2010 convention and show here. Other significant sources are customers, 18%, anonymous tipsters, almost 13.5%, and vendors at a little more than 12%. It often takes 18-24 months to uncover a fraud.

Bohinc had a sense of humor. He showed a slide of well-known fraudsters, such as Enron’s Ken Lay and Wall Street swindler Bernard Madoff, and he included the Cleveland Browns masquerading as a football team. That was before the Browns beat the New England Patriots.

All financial fraud depends on a “fraud triangle,” the CPA explained. There’s need, which creates the motive, some non-sharable financial pressure that may come from health problems, gambling debts, drug abuse of the like. The thief rationalizes his or her actions — “I deserve it” or “I’m just borrowing it.” The third side of the triangle is opportunity, which is what business owners can control with policies, procedures, controls and safeguarding of assets.

Bohinc delineated the various types of fraud, some of which is committed by business owners, such as cooking the books to avoid taxes or inflating the value of assets to get a bigger bank loan.

Bohinc focused most of his talk, however, on theft by employees that runs the gamut from workers compensation fraud to skimming cash to overstating expenses to stealing inventory for use on side jobs. All frauds start small, he noted, so the thief can see how much he can get away with.

The estimated loss as a percentage of sales per year, he said, is 5% of U.S. GDP, or $730 billion out of an economy of $14.6 trillion. Bigger firms lose less. The median loss for firms with 10,000 or more employees is $84,000. The median loss for firms with less than 100 employees is $150,000. Bigger firms have better controls.

Thieves are typically 31-50-years-old, two-thirds are male and over half are long-term employees.

Billing fraud resulting in bogus payments is the number one scheme, he said. Check tampering comes in second.

Once the fraud is discovered, the chance of recovery is usually zero; the money has been spent. Any employee handling money needs to be covered by a fidelity bond. Once a contractor files a claim, the insurer will send out a certified fraud examiner to investigate, but he’ll stop looking once he hits the maximum loss on the bond, which may be $500,000 or $1 million.

It’s always cheaper to prevent fraud, Bonhinc said, with set procedures that are enforced. Just stating that you will look for theft tends to reduce it, he said.

Bohinc’s seminar was bolstered by powerful testimony from two contractors in attendance who had been robbed blind by their bookkeepers.

Theresa Dagenhart, Long’s Corp., Fairfax, Va., took over a business that had been started by her grandfather during the Depression. The men had always been paid in cash — some didn’t even have bank accounts — and Dagenhart continued that tradition when she took over the business.

The business consistently lost money no matter how much revenue came in on the top line, and Dagenhart wondered if she was just a bad manager. Eventually, however, she showed her books to a mentor from Quality Service Contractors who told her that it looked like embezzlement but he couldn’t pinpoint it.

It was embezzlement. Her bookkeeper, a 68-year-old woman with a walker and an addiction to pain pills, would give her inflated payroll requests that included as much as $5,000 a week for herself. Even after Dagenhart began issuing checks for payroll, the bookkeeper was still stealing from somewhere but Dagenhart never discovered how.

Another heartland contractor, who requested anonymity, lost $500,000 to a bookkeeper who used computer software to alter the payee on a check. The contractor would sign the check to a vendor and the bookkeeper would delete the name of the vendor and put her name on the check. When the bank statement came in, she found the page with the canceled check in question on it, scanned it into her computer, altered the payee back to the name of the vendor, printed the page, folded it in with the rest of the bank statement and put it back in the envelope. It only took a couple of minutes.

The theft was discovered by accident when the bookkeeper was out sick. The contractor’s father was in the office, opened the bank statement and found a $15,000 check made out to the bookkeeper.