Comstock's magazine 1117 - November 2017 - Page 50

n FINANCE I f federal authorities are right, the scheme was simple. El Dorado Hills resident Jeffrey Davis was national sales manager for Nature’s Path Foods, a Vancouver-based organic food company. Glen Martinka co-owned a food brokerage and distribution service based in Phoenix that marketed and sold Nature’s Path products. Davis could authorize Nature’s Path purchases of at least $3,500. Prosecutors allege that between December 2008 and April 2012, Davis used that power to work with Martinka to create fake invoices, charging the company for non-existent services. Davis submitted those for reim- bursement, and he and Martinka then split the proceeds, the feds say. Over three and a half years, the pair allegedly stole about $219,000. (Nature’s Path didn’t respond to a re- quest for comment.) Cashiers create fake transactions. An attorney diverts money from nonprofits whose accounts he managed. A credit union staffer falsifies bank documents. These are a few of at least nine cases of proven or alleged embezzle- ment in the region since 2013. “With fraud, there’s always something new and different. You never see it all — they just keep coming,” says forensic accountant Annette Stalk- er of Stalker Forensics in Granite Bay. Most local cases involved mid-sized companies, banks or charities. Each year, small and mid-sized orga- nizations, including small businesses, lose the most to employee theft. A study released in August by interna- tional insurer Hiscox reported that the median employee theft case cost companies an average of $1.13 mill ion in 2016, and that 55 percent of cases involved companies with fewer than a hundred employees. And while no one keeps national data on employee embezzlement, a 2016 survey of fraud examiners estimated that it costs busi- nesses and other organizations a full 5 percent of revenue each year. A sense of autonomy is often what keeps staff happy in small businesses. But every virtue has its vice and when it comes to money, independence is cousin to temptation. Small firms have fewer employees, but they lose the most in these schemes. The fraud examiners’ survey found that the median loss at organizations with fewer than 100 employees in 2016 was $150,000, while losses at those with 1,000-10,000 employees were only $100,000. But most companies don’t get interested in better controls until they’ve been hit, says Stalker. Small and mid-sized companies are behind for obvious reasons — they think they don’t have enough staff to segregate duties, and they’re more likely to employ family members and long-term employees, so relax what controls they do have. That’s why those who investigate swindles say small- 50 | November 2017 business owners can make inexpensive business-process changes to avoid being the next target. YOU THINK YOU KNOW SOMEONE A common theme runs through many cases of employee theft: The perpetrator is a longtime, trusted employee, so oversight has been relaxed. “It’s sort of like, 'Hey, we know him. He’s been around a long time. It’s OK that he’s not following the exact rules,'” says John Barrett, director of EisnerAmper’s forensic, litigation and valuation services group in Sacramento. Owners who don’t understand the work of their specialist employees are especially likely to fall prey. Barrett worked on a case like that not long ago. A com- pany hired its first-ever IT director to update the firm’s software and equipment. The owners saw immediate ben- efits. Over time, they gave him ever-more responsibility and independence. Finally, they put him in charge of his own budget, and he reviewed and approved vendors and related deliveries. His supervisors didn’t know that he had family mem- bers and friends who worked in IT. So, he started ordering fictitious or wildly price-inf lated parts and services. He’d send $10,000 to his brother’s company for computers that never arrived, and the brother would pocket $3,000 and send him $7,000, says Barrett. The owners didn’t un- derstand enough about tech to know that the spiraling spending indicated a problem. The director was caught only when the company brought in a second tech staffer, who asked a board mem- ber why the IT equipment budget was so large. When the company landed some government contracts, the board member took his questions to the government’s auditors, who uncovered the slow-moving heist. WHITEOUT, TAPE AND A KNIFE Companies targeted often have something else in com- mon: The owners don’t look at financial statements. That played a role in one of Stalker’s recent cases involving an area mortgage broker. A longtime staffer shared a small office with the com- pany’s main bookkeeper. They became friends, and the officemate learned where the bookkeeper kept her login passwords. That laid the groundwork for a low-tech, multi-part scheme. The bookkeeper worked part-time and came into the office at noon. So the officemate showed up most morn- ings at 5 or 6 a.m., before anyone else was in. On those days, she had a priority task: Login to the accounting software as the bookkeeper and write a check to herself, usually for