Small Business Embezzlement – Atlanta Certified Fraud Examiner



Small Business Embezzlement | Atlanta Certified Fraud Examiner

As a solo business owner, Sam enjoyed looking at numbers, but didn’t quite understand the accounting world. He used a CPA firm and saw the value of their service. His landscape company grew from Sam hauling around equipment on a trailer cutting residential lawns, to establishing contracts with commercial real estate owners, homebuilders and community sub-divisions. As the business grew, his wife who had been their quasi-bookkeeper stepped out of the picture and Sam hired her part-time replacement, Julie. Sam was not an experienced CEO, but listened to business people and their stories of embezzlement by employees. Before turning over the keys of the company to the new bookkeeper, he decided to take on specific duties. Sam would keep the checkbook. He paid all the bills, examined invoices and knew every vendor. He also processed the company’s payroll.

Sam’s family welcomed the addition of a new baby. The new baby, his accounting duties and life’s overall demands began to show as his business became stagnant. He also found himself filling in more and more for missing crew members, so sales efforts took a back seat. Their small office was a former two bedroom home in a commercially re-zoned part of the city. It had always served their needs, but he wanted something nicer. The exterior was in decay and adjacent road improvements eroded their previous space. The real estate market was improving which meant new opportunities. He knew changes were needed.

Part of the changes included increasing Julie’s work hours and giving her the expanded role of marketing and lead generation. She was a whiz on the internet and leveraged its power for sales. He replaced some crew members and one crew leader. One of his new marketing ideas included some free promotional services. He began to gain new customers and it showed in his bank account.

One evening Sam attended a meeting of his local Chamber of Commerce, where one of his new customers commented about their service. The customer was satisfied but commented about the delay in a recent check payment clearing the bank. Sam made a mental note to ask Julie, but never got around to it.

The busy season ended and tax time rolled around, which meant sending information to the CPA. Sam’s CPA did his usual thorough job, including finding a tax credit for newly purchased computer software.

The following year Sam added more customers, more crew members and purchased more equipment. He identified a new office location. A client was going to give him a great deal on the space and would reduce the lease rate in exchange for landscaping services. The year was coming to an end and before signing the lease agreement, he wanted to run it by his CPA during their annual review. During the review, Sam’s CPA asked if he had lost customers. No, in fact it was just the opposite; however, some customers who previously paid promptly were slowing down a bit. Others were experiencing challenges and asked for extended payment terms. Sam also stated that increased gasoline prices were taking their toll on everyone.

The following spring came and business was about to gear up. This would be the year of moving to the new office location. Julie had taken time off, which she hated to do, for a necessary surgery. She was a great employee who never missed a day, and was a part of his extended family. While Julie was off Sam received a phone call from one of his largest customers. The customer was having an audit performed. The customer’s auditor noticed payments made to Sam’s company would sometimes clear at one bank, and at other times to a totally different bank. It was a back and forth pattern, which the auditor thought was strange.

So the embezzlement unraveled. Julie was diverting payments intended for the landscape company to her personal account. It was only by accident that Sam took the phone call. The embezzlement began over a year earlier, around the time a customer had commented on a delay in a cleared check. Fraudsters often start out slowly and cautiously, and test controls to see if any questions are asked. Only two of the customers who Sam believed had asked for extended payment terms, had actually done so. In fact, he learned Julie was relentless if there was the slightest delay in an invoice being paid. Now, the question posed by his CPA concerning fewer customers made sense. It was estimated Julie embezzled around $30,000.

This is an all too familiar scenario of what the small business owner faces. Deception by an employee who is like family adds insult to injury. Sam had taken careful steps to control his accounts payable, or the damage likely would have been much greater. The median loss is $145,000 per fraud incident, according to the 2014 Association of Certified Fraud Examiners, Report to the Nations.

The small business is much more likely to experience the pain of embezzlement. In this case, Sam’s CPA did pose a question; however, CPA’s typically do not look for fraud. This misperception gives the small business owner a false sense of security. A viable option is to have a fraud/risk assessment conducted. It’s less costly to prevent embezzlement than to respond later. Bankruptcy is not an option you want to consider. No one ever believes their Julie would be in disguise, but when it happens the damage can be fatal.

Small Business Embezzlement Georgia

Zane Kinney, CFE, PI



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