Embezzlers stealing trust of small businesses in Hampton Roads

A former bookkeeper at Ballard Fish & Oyster Co. Inc. pleaded guilty this month to mail fraud after embezzling almost $2.3 million over a five-year period.

In September, a former executive assistant at Volvo Penta of the Americas Inc. in Chesapeake pleaded guilty to embezzling $502,000.

And in August, the former office manager of a medical practice in Hampton was sentenced for embezzling $278,000 over five years.

Blame it on the weak economy and how a few individuals respond to mounting financial pressure, said Douglas Ziegenfuss, chairman of the accounting department at Old Dominion University's College of Business and Public Administration. They resort to stealing when they cannot rein in their spending, he said.

Christopher T. Marquet, the head of a Boston-based investigative firm, however, faulted the extravagant lifestyles that some people pursued but couldn't afford.

"The vast majority of embezzlers are driven by greed," declared Marquet, CEO of Marquet International Ltd.

Ziegenfuss and Marquet, both fraud experts, agreed on one thing: Employers, especially small-business owners, must take greater responsibility for curbing the risk of embezzlement.

Too many small businesses, they said, fail to maintain basic internal controls, such as segregating financial tasks and reviewing key documents.

"Entrepreneurs aren't interested in the minutiae of bookkeeping," Marquet said. "It's utterly boring, so they put their trust in a bookkeeper."

The number of arrests nationwide for embezzlement fell 20 percent between 2007 and 2009 to 17,920, according to the FBI's Uniform Crime Reports. Yet Hampton Roads businesses have seen a spate of high-profile cases recently.

In the Ballard case, the defendant wrote 173 company checks for personal credit-card bills and masked the payments with false accounting entries for payments to companies doing business with the Norfolk-based fish and oyster company, according to federal court documents.

The Volvo worker submitted fraudulent reimbursement requests to the manufacturer of marine engines.

The Hampton medical office manager disguised what she took with accounting entries for payments to legitimate vendors.

"It's your closely held and family-owned businesses that are especially vulnerable to fraud," Ziegenfuss said, because they rely heavily on trusted employees.

Small companies that grow quickly also become vulnerable if they haven't strengthened their internal controls along the way, he said.

Embezzlement cases tend to share a handful of characteristics. In a study of 485 major cases that came to light last year, Marquet found that 64 percent of the perpetrators were women. Nearly 87 percent of the cases involved employees who held jobs in finance, bookkeeping or accounting, he said in the study, which was released Jan. 11.

The most common scheme involves issuing forged or unauthorized checks.

What's striking about much of the embezzlement at small businesses is the schemes' lack of sophistication and the ease with which losses could have been avoided, said Stephen M. Jones, a CPA and partner in the Norfolk accounting firm Strickland & Jones.

"The most common denominator is management not reviewing their own bank statements," Jones said.

Bigger businesses tend to be less vulnerable to embezzlement because they have internal auditors and stronger internal controls.

Even municipalities are not immune. A former national sales representative for the Virginia Beach Convention & Visitors Bureau pleaded guilty this month to felony embezzlement for using his city Visa card to pay about $15,000 in personal expenses.

Employee fraud typically comes to light from a tip, not from an audit, according to the Association of Certified Fraud Examiners.

Among 1,001 employee-fraud cases that the association's members examined last year, almost 38 percent were detected by a tip, it said in its 2010 Global Fraud Study issued earlier this year. Internal audits turned up employee fraud in 13.7 percent of the cases studied, and outside audits accounted for fewer than 5 percent of the cases, according to the report.

While some people downplay the effects of employee fraud, the companies victimized sometimes have to scale back operations and may have to lay off workers.

One company badly hurt by embezzlement is Decipher Inc., a producer of games and game cards.

The Norfolk company, known for its "Star Wars" cards, was forced to slash its workforce after suffering heavy fraud-related losses. Its former vice president of finance pleaded guilty two years ago to embezzlement by routinely forging company checks and using other schemes. Prosecutors contended that he stole more than $1.5 million from Decipher over a nine-year period.

Whenever evidence of embezzlement surfaces, the owner or manager should dig deeper, because the fraud often is more extensive than it appears, fraud specialists said.

"If you found one problem, you've got to look at everything that person touched," because embezzlers routinely resort to more than one scheme, said Marquet, who worked for almost 20 years with the international investigative firm Kroll Associates.

That was the case four year ago at Hampton Roads Obstetrics and Gynecology in Hampton.

An accountant preparing a tax return for the medical practice discovered $60,000 of company checks that the office manager wrote for non-business purposes and disguised with fraudulent accounting entries. After firing the manager, the practice uncovered much greater losses, including personal transactions involving a company credit card, according to the defendant's plea agreement in April.

CPAs who have worked with embezzlement cases said victimized companies rarely recover much from their embezzlers.

"The likelihood of recovering assets is pretty slim, because people committing these schemes spend what they get on things like trips, meals, drugs and gambling," said Peter Alfele, a CPA and audit partner with the accounting firm Cherry, Bekaert & Holland.

Businesses and nonprofit organizations can reduce their embezzlement-related losses by buying insurance covering employee theft. In addition, companies should consider paying for a whistle-blower service that enables anonymous tipsters to contact the company, Alfele said.

Nonprofits may be even more vulnerable to embezzlement than small businesses, because they often operate with lean staffs and may lack sufficient controls over their finances.

Anyone thinking about launching a nonprofit should devise a strong business plan that includes accounting safeguards, legal counsel and an annual financial review or audit, said Stephen D. Lentz, a Virginia Beach lawyer who works with nonprofits. If the organizers can't come up with a plan that includes strong internal controls, he advises them to drop the nonprofit idea, he said.

Whenever a nonprofit suffers a loss from employee fraud, its board members and management may be reluctant to report the loss to law enforcement agencies, out of fear that publicity would tarnish the organization's reputation and dampen donations. But failing to report a loss and pursue the perpetrator sends a damaging message - that fraud will be overlooked, Lentz said.

"I think donors are comforted when active steps are taken to punish an offender," he said.

Business owners, too, have to act on employee fraud and report any embezzlement for the same reasons, Ziegenfuss said. "When you're in charge, you have to set the tone," he said. "You have to give clear instructions that fraud won't be tolerated."

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com