Oftentimes, when an employer hires an employee, they are looking to hire someone for the long term versus the short term. So, whenever you have an employee that has been with the company for an extended period of time it is often viewed as a good thing. The company must treat its employees great, pay them well and be a very stable place. However, sometimes businesses get lazy when it comes to long term employees and tend to look the other way because of a perceived loyalty to the business. This is often where a long-term employee may take advantage of their employer and be tempted to embezzle several hundreds of thousands of dollars like our fraudster did in this case involving a small manufacturing company.
The manufacturing company has been in business for almost 65 years. For almost half that time, 30 years, our fraudster has been employed as their bookkeeper. Someone that has been with the business that amount of time obviously has a significant amount of tribal knowledge and would definitely be working with minimal to no supervision. At this point, our fraudster was basically family to the owners of the business. The owners viewed the bookkeeper as a trusted employee who knew the ins and outs of the accounting system and books much better than they ever could. This type of trust oftentimes leads to leg one of the fraud triangle, opportunity.
Although law enforcement reported that the fraud occurred over a nine-year period, a five-year period was reported with losses closing in at almost $700,000.00. The fraudster would transfer anywhere from $2 to $10 thousand at a time to personal accounts from the business account. The transaction would be falsely entered into the ledger system to make it appear to be a legitimate expense. In one year alone there were 59 separate transactions totaling $90,000.00.
These types of schemes can often be difficult to catch if the businesses internal control system is not being implemented or enforced. A simple review of vendors and payables needs to occur at least once a year. Verifying that a vendor is legitimate is as simple as a phone call, along with verifying all transactions. A long-term employee that has always operated in a silo can oftentimes hide fraudulent transactions if ownership is not diligent in reviewing vendor invoicing.
The fraudster was facing up to 20 years in prison and a $250,000.00 fine for the crimes committed. Because the fraudster failed to include the embezzled funds as income this person was also facing an additional 3 years in prison and an additional $100,000.00 fine.
Our fraudster pled guilty to wire fraud and filing false tax returns. The courts sentenced this fraudster to 43 months in prison, just over three and a half years. The fraudster was ordered to pay restitution of $1.3 Million to the manufacturing company and $175,000.00 to the Internal Revenue Service for the fraudulent tax returns. The fraudster was ordered to turn over proceeds of the theft and any equipment used to commit the fraudulent acts. The fraudster was forced to sell their home, recreational property and two classic cars they owned as part of the judgement against their fraud.
A separate interview with the business owners uncovered that the embezzlement may have been closer to $1.2 Million over a 10-year period. The business was forced to lay off four of its employees and one person admitted they were going to have to delay retirement because of the fraud. Eventually, the four employees that were laid off were re-hired.
If the business had only implemented and enforced simple internal control measures it may have caught this fraud earlier and limited the damage to the business and its employees. It is easy for a business owner to focus on area’s that are of most interest to them and leave something as mundane as financial record keeping to someone else. Especially when that person is viewed as a long-time trusted employee. Not every business can come back from an embezzlement in the hundreds of thousands or even millions of dollars even with restitution being paid in part or in full.