Employee fraud costs business owners around the country billions of dollars each year.
Missoula businesses aren’t immune to the pain. In fact, small businesses are some of the hardest hit by theft and embezzlement.
“We prosecute people who all kinds of bad things,” Missoula County Attorney Fred Van Valkenburg said during a presentation last week for the Missoula Chamber of Commerce. “There’s an awful lot of stealing that goes on, the biggest dollar amount is employee thefts.”
Van Valkenburg spoke last week on common causes and prevention tactics to deal with employee fraud at the Chamber’s current business issue forum.
Statistics show that year after year employee theft – whether its stealing cash from the till or elaborate bookkeeping schemes – accounts for billions of dollars of losses and effect industries across the board.
The Association of Certified Fraud Examiner’s 2012 Report to the Nations on Occupational Fraud and Abuse shows that internationally, employee fraud costs businesses $3.5 trillion last year. The ACFE report focuses on “occupational fraud,” which covers a wide range of employee misconduct.
Almost half of businesses hit by fraud never recover the losses and small businesses often suffer larger median losses, the ACFE report said.
The likelihood that employees are looking for opportunities to steal is high. Research shows 10 percent of employees would never steal, 10 percent will always steal and 80 percent of employees may or may not steal depending on how they view the opportunity presented, Van Valkenburg said during his presentation.
Vigilance and investment in fraud prevention controls is crucial to helping stop theft, he said.
Van Valkenburg recalled a 2005 case against John Seymour, the former Missoula International Airport director who pleaded guilty to four felonies and two misdemeanors in the theft of $645,000 in public funds from the airport. Seymour received four 10-year terms, one for each felony, and two six-month jail terms for each misdemeanor and served time in Montana State Prison.
Theft usually isn’t carried out by the head of an organization who is making a higher salary. Even more unusual is that the airport got virtually all the money back, Van Valkenburg said.
“That’s a rare, rare instance,” Van Valkenburg said. In most cases, “you’re going to be darn lucky to get 10 cents on the dollar when it’s done.”
More common are cases like the recent prosecution of Scott Peterson, who pleaded guilty in July to two counts of embezzlement and one of tampering with or fabricating physical evidence after stealing almost $1 million from three Lucky Diamond casinos in Missoula and Billings.
Managers and employees that regularly handle money are the most likely to steal.
“You would be surprised at how many people just write themselves a check,” Van Valkenburg said.
The grim statistics are hard to stomach, but research has found antifraud controls help decrease losses, ACFE report said.
Reducing the opportunities for theft is key to prevention. No. 1 is making sure more than one person is in charge of finances and cash transactions, Van Valkenburg said.
“Businesspeople, probably because they’re looking to put resources into sales, service or whatever the main function of the business is, only have one person responsibilities for the books,” Van Valkenburg said.
After the Seymour fraud case was resolved, the Missoula Airport implemented several measures to further prevent fraud. The measures were suggested by an independent forensic accountant’s audit of the airport’s finances, said Teri Norcross, Missoula International Airport finance manager.
“Really, the process that we had in place at the time worked. We did catch the fraud,” Norcross said. “But we implemented some things, we now have double-signers on checking accounts, we go through a lot of processes for all the payments. We’re just more aware.”
A crucial change in Norcross’ view is the “whistle blower policy” that was implemented.
“The No. 1 thing I would tell you is of value in preventing fraud is communication among staff and senior staff, making it be very open. If anyone is seeing something that is weird they can come forward easily,” Norcross said.
Along with implementing dual control procedures, businesses need to have an outside audit system in place. Keeping too much cash on hand and being “absentee owners” are other practices that can lead to increased fraud, Van Valkenburg said.
If fraud is suspected, Van Valkenburg urged business owners to call law enforcement to conduct an official investigation.
Some business owners would “just as soon not want anyone to know” about theft, but “public exposure” helps ensure that person won’t be put in a position of trust again, Van Valkenburg said.
Hiring a forensic accountant to compile a report of activities is worthy investment, as law enforcement agencies often have limited resources and expertise to investigate financial documents, Van Valkenburg said.
The ACFE fraud prevention checklist suggests employers ensure ongoing antifraud training is provided to all employees and that effective fraud reporting mechanism in place.
Ensuring management sets a tone for honesty and integrity in the workplace is also suggested on the ACFE checklist.
Dani Solonar, director of services at Missoula Developmental Service Corp., said Van Valkenburg’s presentation was a good reminder that that constant evaluation of antifraud measures is crucial.
“One of the things we’re always looking at is making sure we’re doing everything we can prevent fraud,” Solonar said.
MDSC’s Chief Executive Officer Fran Sadowski and human resources director Karen Harrison also attended the meeting.
Harrison said MDSC is “uber control oriented” and is audited by many agencies because it receives government funding.
Still, “you really have to keep it on the forefront. I really suspect there’s more theft than we realize. I think that happens to any company. Those things add up for companies,” Harrison said. “You have to stay hypervigilant.”