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Guard Your Dairy against Embezzlement

02:41AM Nov 06, 2014

Fallon-DFA-Olsen_Dairy_3-5-13_053_-_new_small( Catherine Merlo, Dairy Today )

It happens more often than you think. Here’s how to protect yourself.

You may not believe that a trusted employee would ever embezzle from your dairy. But, in fact, the likelihood is high that it will happen. Guarding against fraud is an owner’s responsibility -- and it starts with understanding and controlling the opportunities for financial theft by an employee or even a family member.

“Less than 50% of embezzlement cases are ever reported,” said Mark Brady, a CPA and partner with the accounting firm of Cooper Norman in Twin Falls, Idaho.

Speaking at Dairy Today’s Elite Producer Business Conference in Las Vegas today, Brady said many businesses fail to report embezzlement because they don’t want to deal with the publicity or the cost of litigation. “Another reason is that they want it to be over and done with because they know they’ll never collect” from the perpetrator, he added.

Mark Brady

Brady described embezzlement as “fraudulent conversion,” a term that “simply means the person willfully and without claim of right or mistake converted the property to his or her own use.”

Embezzlement’s Startling Statistics

He laid out startling facts and figures to show just how pervasive embezzlement is:

•         The median loss caused by fraud cases in a study was $140,000. More than one-fifth of these cases caused losses of at least $1 million.

•         The frauds reported lasted a median of 18 months before being detected.

•         Fraud is more likely to be detected by a “whistle blower” or tip than by any other method.

•         Eighty percent of employers do not believe any of their workers would view or steal confidential information.

•         Seventy-five percent of employers admitted to not having any enforceable systems in place, and one-third of those believe that they don’t need those systems.

•         Two-thirds of employers don’t change passwords to stop ex-employees from being able to access sites or documents.

•         Twenty-seven percent could not identify the biggest threats to their data.

•         Fourteen percent did not even know whether employees have stolen data.

In a survey of 2,000 employees by LogRhythm, 23% admitted to having accessed or taken confidential data from their workplace, and one in 10 do it regularly, Brady reported. Most accessed confidential data about colleagues’ salaries and bonuses. Of those who have accessed confidential information, 94% have never been caught.

Pressures Behind Embezzlement

Employees who engage in embezzlement are often driven by incentives or pressures, such as excessive spending to keep up an appearance of wealth or by other outside business financial strains. They may be involved in illicit romantic relationships or have problems with alcohol, drugs or gambling. Some are driven to the crime by a need to hit predetermined financial results.

Embezzlers can be anyone – long-time and new employees, owners, managers, people with and without criminal backgrounds. Nearly 63% of all embezzlers are women, but the dollar amount of cases with male embezzlers is nearly double that of females, Brady said. The average age when embezzlement starts is 42.

Embezzlement occurs because an employee has the opportunity. “Your business may have a lack of internal controls,” said Brady. “Your office may provide sufficient access to assets and information that allows an employee to believe that fraud can be committed and successfully concealed.”

When they’re caught, embezzlers often rationalize their crime by saying they were only “borrowing” the money temporarily. They may say the embezzlement was justified --“I was being underpaid and took what was mine.” They may explain their fraud by depersonalizing the victim – “I wasn’t stealing from the boss, just the company.” They may attempt to downplay the financial theft by saying, “We’ll make it up next quarter.”

Signs of Fraud

Brady offered a list of signs that an employee – or even a family member – may be embezzling from your business:

•         Your company is generating the same amount of revenues but suddenly making less profit.

•         It’s hard to locate reports for specific days.

•         An employee takes too many days off -- or none at all.

•         Conversations get hushed when you enter a room.

•         Inventory counts get harder to tally.

•         An employee’s lifestyle does not make sense. For example, a modestly paid employee may start driving a very expensive vehicle.

•         You may notice frequent and significant transactions that are difficult to audit.

•         An employee may place undue emphasis on earnings projections.

•         Your accounting department is too lean.

•         You have a decentralized organization without adequate monitoring.

Control measures

So how can you minimize the embezzlement risk? Brady offered these control measures:

•         Conduct surprise audits and inspections.

•         Don’t over-rely on external audits. Twenty-three percent of fraud cases are detected by internal audits; only 11% are uncovered by external audits.

•         Educate employees about the risk-prevention measures your office has in place.

•         Reduce situational pressures that encourage financial statement fraud.

•         Set clear standards.

•         Check employee references.

•         Secure your organization.

•         Safeguard your payroll.

•         Control who reviews sensitive documents.

•         Perform independent reviews and additional audits.

•         Require back-up documentation.

•         Never pre-sign checks.

•         Make sure financial duties are segregated. For example, the same person should not make and record deposits as well as record the dispersal of checks.

•         Make sure you have audits and board-level oversight.

•         Encourage whistleblowers.

•         Implement automated controls.

•         Implement hotlines to receive tips from both internal and external sources. “Reporting mechanisms should allow anonymity and confidentiality, and encourage employees to report suspicious activity without fear of reprisal,” said Brady.

As the owner, you should sign all checks, including payroll, he added. You also should require that employees who work in “high risk” areas take vacation.  Brady cited then embezzlement case of Rita Crundwell, who embezzled $54 million in city funds over more than two decades in her role as city treasurer for Dixon, Ill. Crundwell never took time off until her employer insisted. It was during her vacation, Brady said, that a replacement employee discovered her embezzlement.

“As the owner of the business, you should insist that good audit trails be created for all transactions,” Brady said. “You should also know record retention recommendations. Allow your employees only limited access to accounting records and personal information.”

Contact Mark Brady at (208) 733-6581 or visit