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WisBusiness: Sinking economy could mean rise in employee theft
9/2/2009

By Kay Nolan
For WisBusiness.com

Statistics compiled by the National White Collar Crime Center and the Wisconsin Office of Justice Assistance show that embezzlement by employees may be on the rise during the current economic downturn -- at a time when businesses can least afford the losses associated with employee theft.

Those losses can be significant and complex.

Not only do embezzlers steal thousands of dollars, they force their employers to hire accountants and attorneys to straighten out the mess and pursue legal recourse; production time is lost as company staff spends exhausting hours searching to uncover the extent of the deception; and of course, there is the cost of hiring and training someone to replace the dishonest employee and of implementing improved systems of checks and balances.

HOW TO SPOT AND AVOID POTENTIAL EMBEZZLEMENT

With the downturn in the economy, the temptation for employees to embezzle funds can be enhanced. Implementing safeguards now could help prevent an unpleasant discovery in the future.

According to a study by Marquet International Ltd. on white collar crime in 2008, nearly 60 percent of the perpetrators of embezzlement of more than $100,000 were women; but male perpetrators accounted for more than 75 percent of all losses. People ages 40 to 49 caused nearly 50% of the losses. The average scheme lasted 4 ˝ years. Only 3 percent of the cases involved workers with prior criminal histories.

How to spot possible embezzlement:

* Employees who embezzle are often longtime, trusted workers -- the ones you'd least suspect.

* The more authority an employee has, the greater the opportunities to embezzle.

* Other red flags include:
-- Employees who resist taking vacations and who are reluctant to train co-workers to share their duties.
-- Employees with an upgrade in lifestyle that doesn't match their level of compensation
-- Employees undergoing personal crises such as a divorce or who are under financial strain
-- Employees who believe they are undercompensated or that top management is over-compensated.
-- Employees whose work habits or attitude has changed, and not for the better.
-- Situations where the company accidentally slips up, such as paying a bill twice, which some employees might view as methods to exploit.
-- Embellishment of resumes, which could portend dishonesty in other areas.

Preventive measures that are easy and cost little to implement:

* Enforce vacation time; have someone else fill in for the vacationing employee in his or her absence.
* Rotate job responsibilities, so that one employee does not continually have the same accounting function, for example.
* Conduct surprise audits -- a manager might ask to look over a certain account, take inventory, etc.
* Check court records and local news -- one Wisconsin employer was tipped off to embezzlement after he spotted a newspaper article that indicated an employee of his had stolen from a previous employer.
* Don't rely on outside audits, which are designed to ensure compliance with accounting regulations, not to detect fraud.

Sources: Tracy Coenen, CPA, MBA, author of "Essentials of Corporate Fraud"; National White Collar Crime Center; Marquet International, Ltd.
Preliminary figures for 2008 compiled by the Wisconsin Office of Justice Assistance list 275 arrests in the state for embezzlement, up 10 percent from 249 in 2007 and 55 percent more than 2005, which had 178 arrests. A similar upswing in arrests occurred in 2001, when the economy tumbled after Sept. 11. There were 294 arrests in 2001, an 80 percent increase over 1999, which had 163.

Nationally, there was a 16 percent increase in arrests from 2006 to 2007, according to information compiled by the National White Collar Crime Center.

"With each recession during the past 50 years, there's been a corresponding increase in property crimes," said Craig R. Butterworth, communications specialist with the National White Collar Crime Center, in an e-mail statement. "What's the connection, you ask? Criminals always prey on the weak and vulnerable and with so many people desperate to make ends meet, you can bet the bad guys are plying their wares wherever and whenever they can. Embezzlement is no exception."

But preliminary statistics may only be the beginning.

Bill Cosh, a spokesman for the state Attorney General's office, notes that because cases of embezzlement tend to occur over long periods of time, people who begin stealing during the current economic crisis may not be discovered for years.

Cosh said that although data remains to be seen on the extent of recession-triggered embezzlements, it's likely that fraud is more often detected during a recession when people are being more careful with money and fewer opportunities exist to juggle funds.

"For example, under Wisconsin law, home builders are required to place a customer's money into a trust account," he said. "The builder can't draw on the money unless the disbursement is authorized. When the economy is going good, builders may use the money from another customer to complete a prior customer's residence. As long as another buyer is out there who wants to build a house, no problems are detected. However, when the economy slows, home builders no longer have that prospective customer available from which he or she can draw money to pay for subcontractors, materials and supplies. Likewise, in the securities area, investment scams are often discovered when the market turns south, like Bernie Madoff."

Sometimes, embezzlement schemes are uncovered purely by chance.

One Wisconsin firm thought it had sufficient checks and balances to prevent fraud, including annual audits. Now, Seville Imports, a Waukesha food processing plant specializing in olives grown in Spain, is reeling from the discovery that longtime employee Ellen Schroeckenthaler had been embezzling money for at least six years -- in amounts too small individually to raise the auditor's suspicions, but which ultimately totaled more than $25,000.

David Katzuba, company vice president, said management discovered something was amiss when Schroeckenthaler apparently tried to discredit a former co-worker by entering erroneous information into a company computer by using that person's user name and password. To the company's astonishment, subsequent scrutiny revealed hundreds of incidences of stealing by Schroeckenthaler.

"Everything that she had contact with involving money -- every time we looked a little bit closer, we found that was involved and this was involved," said Katzuba. "If she hadn't tried to harm another employee, she'd probably, unfortunately, still be doing it.

"Up until that time, she was a very trusted employee, the classic example: hard-working, worked 10, 11 hours a day, took work home. But what you discover is that some of those 10 hours a day are some of the fraud part."

Schroeckenthaler, 53, was sentenced in March to four years in prison by Waukesha County Circuit Judge Linda Van De Water. The judge upheld the sentence last month even after Schroeckenthaler offered to repay her former employer in full if she could avoid incarceration.

"The ironic thing is that the detective involved, our attorney, everybody we talked to thought, you know, she's going to walk -- she had no (prior criminal) record, not speeding, nothing," said Katzuba. "But she just happened to get the wrong judge and she sent her away for four years."

Embezzlers don't necessarily get off easy, according to Milwaukee County Assistant District Attorney David Feiss.

"People who commit these things do get punished," said Feiss. "Some go to prison even after they make large amounts of restitution. We had a case last year that involved a company in Oak Creek where a top-level manager embezzled over $300,000. He was in his 50s, had no prior criminal record, he paid $100,000 in upfront restitution -- and he went to prison for a year and a half."

For that company's owner, Dennis Lampman, the massive theft felt like a kick in the teeth -- he himself had hired the dishonest worker 30 years ago, and had considered the man a close friend.

"He was my friend first and I brought him into the business. He started from the bottom and worked his way up to being my right-hand guy," said Lampman, owner of Oak Creek's Barricade Flasher Service, a family business started in 1965. "I could communicate with him better than I could my own brother."

The two socialized often and shared a passion for race cars. "I remember bouncing his baby son on my knee," said Lampman. But Jeffrey Bodendorfer Sr., 55, ended up enlisting his son, now grown, in a complicated scam that Lampman believes began as long ago as 2001, before getting caught last year.

Even as the evidence mounted, "I was convinced he wasn't doing anything wrong," Lampman said of his former friend. "But he was doing a lot of things wrong. It was devastating."

Tracy Coenen, a forensic accountant and nationally known fraud investigator based in Milwaukee, says embezzlers typically are longtime, trusted employees, "the last ones you'd suspect."

Embarrassment over being swindled causes many of her clients not to pursue legal action against embezzlers.

"One of the top reasons why many companies don't do anything, other than maybe let go of an employee, but they really don't pursue it beyond that, is because they fear the public finding out. They fear it will harm their reputation in some way," she said. "The other big reason is that most of the time, the people who have been stealing don't have anything to take away. We could go after someone who stole from us and maybe even get a court judgment against them if we were successful, but they have no money; they've been spending it all. It's very difficult to recover the money that's been stolen."

According to the National White Collar Crime Center, 45 percent fewer embezzlement cases were commenced in U.S. District Courts in 2007, compared with 2001, even though arrests for embezzlement during the same time period rose 31 percent. Court cases increased somewhat -- 13 percent -- in 2008, compared with 2007, however.

But Feiss says legal action can be worthwhile.

"Through prosecution, we're able to oftentimes obtain significant amounts of restitution," he said. "Our position has been that the costs of reporting these sorts of things are not great because most of the work that is going to be involved in reporting the crime, they're already going to be doing in terms of reviewing their records to determine the scope of it. We have the ability to assist by issuing subpoenas for bank records that they wouldn't have access to, to help them ensure that they have discovered the full scope of the activity. "

In addition, Feiss said, "if people don't come forward and report these things, it's very easy for people who commit these crimes to move on to the next employer and repeat the conflict and oftentimes, it just expands. "

At Seville Imports, Schroeckenthaler's replacement will not report to an off-site manager, as she did. Checks have to be approved by two different people now. Despite the small office staff, accounts receivable and accounts payable will no longer be handled by the same employee. The company has also hired a part-time accountant who works on-site.

Lampman has also changed the way he does business. He's brought his siblings back into major roles with the business and insists on personally approving all invoices and equipment purchases.

"I'm the buyer now. The cat is watching the whole thing," said Lampman.
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