News reports of a $9.9 million embezzlement at a San Diego-area cabinet shop stunned thousands of woodworkers when national media, including The Associated Press, CNN and MSNBC, broke the story early in March.
Although all businesses are vulnerable to internal theft, woodworking companies rarely face a problem of this type, and certainly not of this magnitude. Far more common might be the "borrowing" of some hand tools, the lifting of a few board feet of lumber, or the disappearance of a can of stain. Thefts involving cash are few and far between.
But the victim of this crime, San Marcos, Calif.-based Quality Woodworks Inc., is a substantial company with almost 20 years of successful operation under its belt and a workforce of 30 or more employees at any given time. If an outfit with this much size and stature could be hit, would anyone feel safe?
The answer, according to security experts, is that no one should ever relax his vigilance - but that there are steps one can take to avert, or at least minimize, exposure to embezzlement.
Take anti-fraud measures
Mike Osborne, director of global security for Toronto-based Kinross Gold Corporation, urges an anti-fraud program designed to detect, prevent and deter both internal and external fraud. According to Osborne, "Proactive components of the plan should include dual controls over such things as bank account reconciliations, accounts payable, and company credit card statements. Other proactive measures include employee awareness training and regular testing of systems. Examples of these tests include comparison of employee addresses versus vendor addresses, bank account comparisons, and merchant codes on company credit cards."
"Equally important is a plan to address a fraud once it is discovered," says Osborne. "If the company does not have an internal security or audit department, it is extremely important to choose a competent and reliable firm to conduct the investigation. Not doing so will result in more heartache for the company, especially if unethical tactics are used during the course of the investigation. Look for investigators with credentials such as certified fraud examiners, former financial fraud experience, and a good reputation in the industry. Prior to engaging the firm, ask for an investigative plan so you can see the logic and progression of the investigation."
Screen employees well
No question, expertise and experience have their place in any plan of defense, but some aspects come under the heading of plain common sense. For example, Larry Richman, chairman and CEO of San Diego-based Heritage Security Services, a contract security guard services company, says, "My best advice would be to screen employees carefully for their credit background and attitudes towards drugs, alcohol and dishonesty. Generally speaking, people with high-risk attitudes and/or irresponsible paying habits tend to bring those behaviors to work with them, particularly addictions like drugs and gambling. They gravitate to like-minded co-workers and often create a culture of progressive permissiveness toward rule violations that contributes to crimes on the job."
Richman also offers "a second rule of thumb - divide and conquer." Generally speaking, he notes, if two employees share a given responsibility, like handling cash receipts, it is less likely for both to collaborate in a theft than it is for a single person to give in to temptation.
At Quality Woodworks, the convicted perpetrator, Annette Yeomans, held the title of chief financial officer and was accused of taking the money over a six-year period beginning in 2001. Sgt. Mark Varnau, a spokesperson for the Financial Crimes Unit of San Diego County's Sheriff's Department, told news media, "On a weekly basis Yeomans would spend $25,000 on her credit card and then pay off the balance the following Monday with company funds." Among the purchases she allegedly made were 400 pairs of shoes ($240,000), designer clothing ($300,000), and 160 purses valued at $2,000 each. She is also said to have remodeled a bedroom into a walk-in closet with a crystal chandelier, and to have acquired a 32-inch plasma television set.
The pace of losses was so great that the company was forced to lay off workers. Meanwhile, Varnau said, there was no outside audit because the owners trusted Yeomans and considered her part of the management team.
More anti-fraud tactics
What methods might be used to thwart an embezzler, or at least uncover him or her? Vincent Ruocco, a partner at Anquillare, Ruocco, Traester and Company, of West Haven, Conn., is a licensed CPA who has focused on internal control assessments, auditing, and asset protection for more than 35 years. He suggests that a policy of mandatory vacations and mandatory duty rotations should be routine for all businesses.
He explains, "It is not uncommon for the embezzler to interfere with the customary workflow to effect the embezzlement. However, if your policies require the embezzler to give up control of his/her work, he/she will recognize that the fraudulent scheme might be more easily detected, and thus be detoured from committing the illegal act in the first place."
Ruocco also recommends setting up a hotline for whistleblowers and training employees in how and when to use it. "While most hotline calls do not trigger fraud investigations," he acknowledges, "one of the best ways to detect fraudulent activity is through other employees. Let employees know about the organization's ethics from the top down. Explain that any unethical conduct imposes costs on everyone. Employees who believe that they are being monitored are less likely to steal."
Of course, it's best that you not hire thieves in the first place. Thus, Ruocco says, "If you intend to place an individual in a position of trust, you should conduct a background check. The typical background check involves employment and education verifications, reference checks, criminal conviction checks, drug screenings and a credit check. You may need the candidate's consent prior to conducting some components of your background check, so you should seek the advice of a qualified attorney."
And then, to make certain that honest employees remain honest, the accountant advises, "Conduct periodic surprise internal audits. These are most effective after identifying high-risk areas." Simply knowing that an auditor may pop in at any moment can act as a deterrent to the would-be embezzler, Ruocco observes.
Employ external audits
At Quality Woodworks, management ultimately did become aware of its problem early in 2008, thanks to a notification by American Express that one of its checks had been used to make a payment on Yeomans' account.
This triggered a yearlong investigation by the Financial Crimes Unit of the San Diego Sheriff's Department that resulted in an arrest this past March. The investigating officer, Detective Vickie Armitage, says that Yeomans is currently serving an 18-year sentence.
According to Armitage, the company fired Yeomans when the investigation began, and has since been able to recover about $2 million from the sale of her home and some other possessions. Nevertheless, as the detective points out, a great deal of damage had already been done. Armitage says that Quality Woodworks management regretted its mistakes and expressed the wish that others throughout industry would learn from its bitter experience.
As a specialist in financial crimes, the sheriff's officer urges all companies to never settle for an internal audit, but to regularly schedule externally conducted forensic audits. These entail not merely reconciling the books, but "picking up each piece of paper and determining who wrote it, why it was written, and who it went to-the way most people used to balance their personal checking accounts."
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