Embezzlement a Devastating Impact

REGION – Embezzling funds is practically a cottage industry in Michigan, which had the dubious honor of reporting the second-highest number of cases in the nation after California in 2011.

Boston-area consulting firm Marquet International found between 2008 and 2011, there were 83 cases of embezzlement in Michigan of $100,000 or more, costing affected employers an average of $750,000 per incident – and that's only calculating the cases that were discovered.

The most common victims were nonprofits or religious organizations, and the suspects were usually women who worked in accounting or bookkeeping roles. The schemes typically lasted five years, and involved writing forged or unauthorized company checks.

Grand Traverse County has had its share of headline-making embezzlement cases recently. According to the sheriff's department, there have been 104 cases since 2010, including 28 this year alone.

One prominent victim was the Society of St. Vincent DePaul in Traverse City. The group's former director pleaded guilty in April and was sentenced to five months in jail.

Investigators believe she may have stolen more than $100,000 over a 20-year span. Soon after, the charity partially shut down for a few months.

Traverse City's chapter of Habitat for Humanity was also in the news after detectives say a former worker stole more than $5,000. The suspect in that case has since also pleaded guilty.

But it's not just small organizations targeted. Larger ones, like Munson Healthcare, have also become victims. The hospital's former accountant was sentenced to nearly four years in prison last December after pleading guilty to embezzling more than $1 million by transferring money to her bank account, and covering it up using fake receipts.

Detective Nathan Ritter, who investigates financial crimes for the Grand Traverse County Sheriff's Department, said even though employee theft is not a violent crime, law enforcement agencies take it very seriously.

Embezzlement, which can reach felony status, "can have a devastating impact on a business, especially smaller businesses like those around Traverse City," said Ritter.

"Most of the time, owners know the employee well and trust that person," he said. "They are shocked when the truth is discovered."

So, as a business owner, how can you protect yourself? Ritter said the first thing is to know who you're employing. He recommends background checks and calling references before hiring people. He also suggests not leaving any cash around, so that employees are not tempted.

"Embezzlement cases usually start off with someone stealing small amounts of cash," he said. "Over time they get bolder and bolder."

Ritter also said to reduce the number of people with access to company checks and bank accounts.

"Too many people handling checks could lead to disaster," he said. "Make deposits nightly. Sign checks personally with a pen, instead of by stamp. Check your bank statements online frequently."

When embezzlement does occur, Ritter said gambling debts are often involved, but other times the motivation is pure greed.

"People aren't paying bills with money they are stealing," he said. "They want a lavish lifestyle, and do things like buy two cars all of a sudden."

Scott Phillips, vice president of Charles River Associates, agreed. The Traverse City resident is a CPA who specializes in forensic accounting, which involves analyzing financial data for legal or law enforcement purposes.

He says the top three things to look for in a potential embezzler include someone who:

– Appears to be living beyond his

or her means

– Gambles frequently

– Is very sensitive about

controlling his or her privacy

Phillips said smaller companies are at particular risk for employee theft.

"Larger companies have more people, which allows them to better segregate the various accounting and finance functions," he said. "But in small companies, fraud may involve a single person who is involved in multiple functions such as invoicing, bank deposits, and accounts payable and receivable."

Phillips said most cases of embezzlement eventually become obvious after a lot of cash is stolen.

"It becomes a snowballing thing," he said. "Eventually, most people get greedy and want more and will get caught."

He also suggests making it clear to employees that their work will be closely examined.

Detective Ritter agreed.

"Check the books frequently," he said. "Let your bookkeeper know up front that someone else will also be checking the books."

But if employers want to catch theft early, the right type audit might be helpful.

Michelle McHale, practice leader of forensic investigators at the international accounting firm Plante & Moran, said ordinary financial statement audits may miss some criminal activity.

"Many times, fraudulent activity falls below the materiality levels of an audit," she said. "Thereby, the chances are diminished that it will be discovered through financial audit steps."

She, along with Phillips, recommends a deeper audit that specifically looks for criminal activity if business owners suspect something may be wrong.

Phillips' most important advice however, is to try and stop theft before it ever occurs.

"Establish an ethical tone within the business that fosters honesty, integrity and personal responsibility," he said. "That's one of the most effective things small business owners can do."