Unraveling embezzlement can be as complicated as an episode of Law & Order. Remodeler Joe Christ says the trade background of most remodelers leaves them at a disadvantage. “We don't know business, so we are vulnerable and naïve about the consequences.”
“[Remodelers] so badly want to delegate something. The first thing they delegate is money, when it should be the last,” says accounting consultant and author Karen Mitchell of Online Accounting ( www.onlineaccounting.com). “What leads people to steal is they don't think the owner is paying attention.”
Wendell Harmer, general manager and owner of The Wills Co., says his company was victimized twice. “The first time it was an entitlement mentality. The employee thought he was working hard and deserved it. The second employee I don't believe was a criminal at heart, but she had a weak moment.” In addition to theft, Harmer says sloppy bookkeepers also damage finances. This takes an emotional — as well as monetary —toll. “It's the worst feeling. We go through all these efforts to provide a good place to work, be loyal, and share profits. To be betrayed over a few thousand dollars is frustrating,” Harmer says.
The following six remodelers dealt with embezzlement and survived. Here are their stories.
Employee's title: Bookkeeper
Tenure: 1 year
Method: The bookkeeper was responsible for paying bills. She had access to the checks and would bring them to Gridley to sign. “I did not review sequential numbering because checks would trickle in,” Gridley recalls. The bookkeeper began writing checks to herself from the petty cash account and forging Gridley's signature.
Discovery: Gridley says the employee was an “earth-mother type” with a teenage daughter, and “is the last person you would think would do something dishonest.” Gridley had been distracted by a fire in the company's showroom. She was just settling back into a routine when she found some forged checks in her statement. She, her partner, and senior staff went through past statements. “We pulled out just the obvious stuff — there was probably much more,” Gridley says. The employee had stolen $5,000 in about three months. “She was getting bolder and bolder. She could have wiped me out if she had gone for six to eight months,” she says.
Follow-up: Gridley's mentor said she had to have the bookkeeper arrested or find a way to get the money back, but she had to move quickly. She filed a report with the police. Gridley hated to send the mother to jail, but she also did not want her to do the same thing to another company. Ultimately, the remodeler chose not to press charges. “She borrowed money from family members to pay us back,” Gridley says.
Gridley called an all-staff meeting. She explained that although the $5,000 theft hurt the company, the employee had significantly damaged her life and reputation.
Policy changes: In Gridley's new check-processing system, two people review everything. “The person reconciling the bank account is not the same person writing the checks,” she says. Bank statements come to her unopened, and she regularly reviews all checks and invoices.
Joe and Susan Johnson (not their real names)
Employee's title: Bookkeeper
Tenure: 1 year
Method: The bookkeeper began stealing within three weeks of starting work at the company. She used several methods.
- She processed extra paychecks for herself. If an employee was on vacation, she would put his name on the draw, but would put her bank account number on the direct deposit. She would deposit some client payments into the payroll account so she could write these extra paychecks to herself. She also paid personal debt using the payroll direct deposit.
- She regularly put company money into the petty cash account so she would have access to this money. She overpaid vendors and deposited the refunds into petty cash. She wrote checks from this account to herself.
- She stalked the mail so she could hide the signs of theft. She also answered calls from vendors about late payments. The owners would sign vendor payment checks, but she would not mail them because she knew there was not enough money in the account.
- She used the company credit card issued to other employees to purchase toys, clothes, and shoes.
- She used the “convenience” checks that are attached to credit card statements and deposited them into the operating account to cover the theft.
- She installed a program on the office computer that would provide her with access to the accounting system from her home computer.
Discovery: The owners received a late-night call from a credit card company asking why they were not paying their bills. They called the bookkeeper to ask her about the issue, and she said she did not have an answer. They told her not to come to the office after hours until they resolved the issue. The owners believed this was just one of many errors she had made during her employment. This soft approach was a mistake. The bookkeeper took the opportunity to delete the files on the accounting system, take the paperwork from the office, and then quit. It was not until later that week the owners discovered the extent of the theft.
Follow-up: The owners are pursuing charges against the bookkeeper. They hired forensic accountants and computer specialists to collect evidence to present to the police. “She is looking at 5 to 15 years — six felonies with what she did at our company,” Susan Johnson says. “The police added a separate felony charge for lying to a probation officer, which could triple that sentence.” The bookkeeper had a past conviction and was on probation with the caveat that she not work as a bookkeeper. Though the Johnsons routinely do employee background checks, the report on the bookkeeper was clean. “The state reviews do not work. You have to find out every county this person lived in and do checks at the county level. You also have to check adjacent counties,” Susan advises.
Besides collecting evidence, the accountants and computer specialists are trying to re-create payroll systems and accounting records. “We're entering all past checks by hand into a spreadsheet,” Susan says.
Two things helped the company survive. First, the owners added fraud coverage to their business insurance a month before the employee started at the firm. “We had a $100,000 policy. The insurance company paid $25,000 toward costs to rebuild our books,” Susan says. The owners mortgaged their office building to keep the company in business.
The second lifesaver was the company's designer and cabinet shop manager. He did not involve himself in unraveling the embezzlement so he could concentrate on selling projects. Having that money coming is helping them recover.
“One thing that hurt us as much as the theft was that she was hiding the truth of where we were financially. We proceeded with things we should not have done if we had different financial data presented to us,” Susan says.
The company has finally reached a point where it has stopped trying to find all the money the bookkeeper stole. “At some point you have to let it go. Just find the big stuff and get your company back on an even footing,” Susan says.
Policy changes: The Johnsons gathered information from accountants, books, and their own experience to create a three-page document of what companies should do to protect themselves against employee theft. “You may think the security protocol is time-consuming, but we spent 80 hours a week for months trying to fix our company. It's not worth that,” Susan says. ( See “Protecting Yourself” for a list of security details.)