Companies pay when fraud is at work

Companies pay when fraud is at work
Internal checks, balances reduce the risk

May 14, 2001
By John T. Slania

Kellie Kelly was known as a loyal, hard-working office manager and bookkeeper at Graff-Pinkert & Co. in Oak Forest.

But Ms. Kelly had a secret: She was stealing money from the company.

Ms. Kelly, 41, made out checks payable to vendors of the company, which buys and sells machine tools. Once her supervisors signed the checks, Ms. Kelly erased the vendor name and made the check payable to herself, to cash or to her credit card companies.

Over four years, Ms. Kelly wrote more than 270 company checks for her own benefit, stealing a total of more than $100,000.

Ms. Kelly eventually was caught and admitted to the scheme in a plea agreement with the U.S. attorney's office in Chicago. She pleaded guilty to mail fraud and was sentenced in March to two years in prison. She also agreed to make restitution to the company.

The monetary loss was staggering to Graff-Pinkert, a family-owned company with 15 employees and $10 million in annual sales.

"Not only was it an enormous business loss, it was also humiliating," says President Lloyd Graff.

"It isn't just the money — it's the defiant act of treason that is so appalling," Mr. Graff says. "When this happens to you, you feel violated."

The experience is not uncommon among the operators of small businesses, according to a recent study, which found that the most costly employee fraud cases occur in businesses with fewer than 100 workers.

The Austin, Texas-based Assn. of Certified Fraud Examiners compiled the study using actual cases collected from its 25,000 members, who investigate fraud in organizations of all sizes.

Analyzing data from more than 2,600 cases, the report shows that the average business loses more than $9 a day, or about 6% of its annual revenues, to employees who steal cash or inventory. All told, employee fraud costs U.S. companies $400 billion a year, the association says.

Small businesses are particularly vulnerable, the study states, losing an average of $120,000 a year to internal fraud, almost as much as the $126,000 lost annually by organizations with more than 10,000 employees.

When asked to conduct an investigation, fraud examiners begin by looking for the "fraud triangle," says Craig Greene, a partner in the financial investigations services group for Rome Associates LLP, a Chicago-based accounting firm.

"The fraud triangle has three elements: opportunity, motive and rationalization," says Mr. Greene, who conducts training seminars for the Assn. of Certified Fraud Examiners.

"Is a person in an unsupervised position that provides an opportunity to commit fraud? Is there a motive — some financial pressure, debt or a gambling problem? Or anger against the company? And finally, there is rationalization. A person rationalizes stealing from an employer because they are not paid enough or they think it is a victimless crime," Mr. Greene says.

As the office manager and bookkeeper at Graff-Pinkert, Ms. Kelly certainly had access to company accounts. And because she was a trusted employee, her supervisors signed the checks she processed without question, Mr. Graff says.

"She would bring us checks to sign with a bill, then she would change the name on the check to hers using (the erase key) on the typewriter. When the canceled checks came in, she would pull all the phony ones," Mr. Graff says. "It was a very simple but quite cunning scheme."

A lack of internal controls leaves small businesses particularly vulnerable to such schemes, experts say.

"In a large corporation, you have an internal audit department and a security department. In a small business, it's not economically feasible," says Donald Svendson, partner in charge of the forensic investigative service practice in the Chicago office of Deloitte & Touche LLP. "In a small business, you often have people in positions of responsibility without any checks and balances," Mr. Svendson says. "Management is so focused on the business, they don't pay enough attention to the detail."

Often, the signs an employee is committing fraud are obvious, but management ignores them, fraud examiners say. "You need to look for lifestyle changes. If an employee is drinking, taking drugs or has other problems, it may be an indicator that there is a potential for fraud," Mr. Greene says.

Excess prosperity also might be a clue, Mr. Greene says. He recalls one case at an auto parts store in the north suburbs in which a $9-an-hour clerk pulled up in a brand-new car, showed photographs of her new ski boat and took winter vacations at a Caribbean resort.

"You ask, 'How could a person afford all of this?' The answer is, she was stealing deposits to the company, averaging $200 a day," Mr. Greene says.

Finally, Mr. Greene says, unusual work habits may be a tip-off. "It's not unusual that the fraudster is your best employee," he says. "He's working 60, 70, 80 hours a week because he needs the extra time to cover up his fraud. And he never wants to take a day off, because he's afraid somebody will look at the books and discover what he is doing."

Ms. Kelly was vacationing at Disney World in April 2000 when Graff-Pinkert managers discovered her scheme. The company's credit card bills arrived, showing a backyard shed purchased at Home Depot and some "Rugrats" videotapes purchased at Office Max, Mr. Graff says.

"We started looking more closely and found some other questionable things," Mr. Graff says. "I fired her before she returned from vacation and called the FBI."