Funny, But True: Give a Second Thought to That Second Chance

You have an employee who makes a big mistake, but comes to you to admit it and offers a solution. So, you forgive him and move on. We all mess up sometimes, and this employee handled it correctly. You give him a second chance.

As Warren Buffett said, “I make plenty of mistakes and I’ll make plenty more mistakes, too. You’ve just got to make sure that the right things overcome the wrong ones.”

But some mistakes aren’t forgivable and employees who make them don’t deserve a second chance.

publishing-scamI once worked with a company whose sales manager was running a scheme. He would sell their widgets to a customer who was a partner in his crime. After the sale, the sales manager would issue a credit, reducing the price of each widget by $1 to that customer. The sales manager and the customer split the extra $1.

The scheme went undetected and over time amassed both the sales manager and the accounts receivable manager a lot of money.

The fraud was only detected because the sales manager accidentally sent a credit to the wrong company, which reported the error. The fraud was uncovered and both managers were fired. But they were not prosecuted for their crimes. (I always advise business owners to prosecute thieves. Read more about that in “Why You Should Always Prosecute Fraud”)

And it turns out the sales manager was actually really good at sales, and once he left, sales declined 25 percent. The CEO couldn’t find a suitable replacement in the following year, so what did he do? He hired back the thieving sales manager.

The CEO’s explanation? While the sales manager never paid any of the money back, he said he was sorry. During that past year, he had found God, repented his sins and begged for forgiveness as a friend and long-term employee.

He lasted six months, until he moved. To jail. Where he was sent for stealing again.

Beyond the obvious lessons of prosecuting fraud and not rehiring people who steal, the other lesson is that some people deserve a second chance and some don’t. As a business owner/CEO you need to know the difference.

 

 

 

Funny, But True: When Employees are Naughty, Not Nice

The popular song may claim this as the most wonderful time of the year and the hap-happiest season of all. December is also the least productive, as many workers take time off for the holidays and when they are in the office, they are distracted. And possibly doing their gift shopping online.

Having employees take adequate vacation is important and critical to the well-being of your business. I encourage every company I work with to encourage employees to take time off, and in fact to mandate the CFO take two consecutive weeks off every year. No, I’m not playing Santa Claus here. It’s about uncovering fraud.

In addition to the benefits of having an employee come back refreshed and rested, vacation is the time companies uncover naughty things some employees may have been up to.

Take the example of dear Aunt Tess. She was a payroll clerk at a company I was working with. She was a loyal and dedicated employee of 25 years, who had never missed one single payroll. Not even less than 24 hours after she had her appendix out. See any red flags yet?

I did, and after a bit of investigation, found dear Aunt Tess had been paying fake employees for 25 years, diverting their income to herself, to the tune of $75,000 to $100,000 a year. She had stolen millions of dollars.

So, I may sound a bit Grinch-like, but when your employees take time off during the holidays, make a list of who has access to your books and do a little checking it twice.

Next week, why did Americans leave 658 million vacation days unused last year, and what impact does not taking those vacation days have on your employees?

Why You Should Always Prosecute Fraud

Sometimes people think I’m harsh when I tell them to always prosecute fraud in their companies. My fraud policy is quite simple, “If you steal, you will be prosecuted to the fullest extent of the law.”

Instituting a fraud policy is one of the easiest things a company can do. But I am continually dismayed to find out how many companies don’t have one. It seems to be an issue they’d rather avoid. Until it happens to them.

When fraud occurs in a company, many CEOs are reluctant to prosecute it. The main reason I’ve found is that it can be embarrassing to admit it happened in your company. They’d rather other people didn’t find out about it. And they don’t want to get involved with lawyers and filling out paperwork. It can also be hard to prosecute someone you know. They worry about hurting the employees’ families. So they find it easier just to let the thief go and keep the entire incident quiet.

Let me remind you what one investor said about Bernie Madoff. “Bernie would never do that. He’s my friend.” That investor lost everything. As they say, with friends like that …. For more on that topic, read my blog, “Nice People Commit Fraud.”

There are several reasons you need to prosecute fraud when it occurs in your company.

One is that when people see you following through on the fraud policy, it deters others from committing fraud. And the opposite may be true if you don’t prosecute it and your employees know about it. They may figure, “Well, Susie got caught. She did get fired, but I heard she found another job right away.” So while in the short run it may be a hassle to prosecute the employee, it can pay off in the long run when you don’t have to deal with this issue again.

And another reason is that if you don’t prosecute them, odds are very high they will go and steal from someone else. Susie got another job because her new employer didn’t know she’d embezzled from the previous one.

I recently read an article in the Atlanta Journal-Constitution about Thomas Conrad, “Decades after ban from industry, Alpharetta man again accused of fraud.” Seems Thomas is a repeat embezzler. He was banned from the investment industry in a disciplinary action in 1971. He apparently behaved himself for four decades. But then he struck again.

He and his son, Stuart P. Conrad, have been accused by the U.S. Securities and Exchange Commission of defrauding investors of $10.7 million through a group of hedge funds they managed. While he cut off any payments to investors starting in 2008, the money was still flowing freely to him, his wife, his son, other relatives and a few of their favorite investors.

They also involved another money manager in one investment that turned out to be a Ponzi scheme.

And did he tell those investors that he had been banned from the investment industry decades ago? You can guess the answer to that one. That is also a violation of federal securities law.

In this case a fraud prevention policy wouldn’t have helped as he had been banned from his industry. But this story does illustrate that once a person commits fraud, he is much more likely to do so again.

Don’t pass along your problem to someone else by just letting a thief go. Prosecute the people who steal from you. They may strike again. Even if they wait four decades to do so.

 

Funny, But True Stories: The Thoughtful Thieves

 

“No way that really happened!”

You know that saying, “You can’t make this stuff up.” I’ve lived that during my career in the turnaround industry. I’ve seen the look of disbelief cross people’s faces when I’ve recounted one of my unbelievable-but-true stories. Like the one I call The Cases of the Thoughtful Thieves.

I’ve dealt with my share of messy fraud and embezzlement, cases in which I had to dig deep and do a lot of research to track down the missing funds and identify the perpetrator. That’s why I was so appreciative of the Thoughtful Thieves. They made my job so much easier.

I was sitting at a CFO’s desk one time while he was on vacation. I recommend to all my clients they encourage their CFO to take two consecutive weeks off and sit at his or her desk, open their mail and just see what happens. You can learn a lot that way.

So I decided to check out this CFO’s mail. Imagine my surprise when I found bank account statements from an account in the Cayman Islands where he’d been stashing the money he had been stealing from the company. Had I been his advisor, I would have strongly recommended having those statements sent to his home or a PO box. Anywhere other than to the company he was stealing from. But maybe there aren’t a lot of fraud consultants available with these handy tips for success.

I was poking around on the computer of another CFO and found a folder on the desktop. It was password protected, but with the blessing of the CEO, I used my handy-dandy password decoder and opened it up. And I found an Excel spreadsheet neatly detailing all of the money he had stolen from the company. Everything had a date on it and tracked the path of the funds he had embezzled. He even had an entry for paying the contractor for his home, done with company funds he’d helped himself to. It’s like he had given me a gift, one that I happily shared with senior management at the company.

For more stories, check out my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.”

Unethical Tech Workers Pose Danger to Your Business

Fraud and embezzlement are two dangers to every company. I’ve written a lot about instituting policies and steps to take to help make your company safe from employee theft. These tips primarily focus on those employees who have access to your financial accounts.

But they aren’t the only employees you need to worry about. Your IT employees may also be capable of potentially causing massive damage to your company, as pointed out in a recent article in Fortune magazine, “How much do you really know about the tech worker you just hired?”

We have all read the headlines about companies like Sony, Target and Anthem/Blue Cross being hacked by outsiders. What is less common knowledge are the problems that can come from within the company. Yes, your own IT employees could be a threat. They have access to valuable information, and if they desire, can threaten to make it public if you don’t pay up. It’s the new age of blackmail.

There is really no way to know how often this happens, because like with many cases of fraud or embezzlement, the corporation often keeps it quiet so it won’t draw unwanted publicity.

And even if an employee leaves, he or she can still potentially blackmail you. It’s been reported that Nokia regularly deals with security issues, including being blackmailed by a former employee who obtained classified information. According to an article in the Helsinki Times, in 2007 a blackmailer asked for millions of euros to protect an encryption key of Symbian phones. The release of that information could have caused millions of dollars in damage.

At least he’s a charitable blackmailer — he asked for half of the money in cash and for the other half to go to charity. Nokia made the donation and paid the ransom, delivering half of it in an ice hockey equipment bag. The blackmailer took the money and ran. The crime is still under investigation.

So how do you protect your company? Your tech employees most likely have access to potentially damaging information about your business. And it can be a whole lot more difficult and complicated to prevent tech blackmailers than it is to set up checks and balances on your financial accounts.

How to prevent problems with tech employees

The key is to start with your hiring practices. Companies desperate to hire qualified tech workers have been guilty of skipping over crucial steps when selecting new employees. Ken Springer, a former FBI agent and founder of Corporate Resolutions, suggested these steps in the Fortune article: Verify everything on the resume, ask your current IT people to check their references, let prospective employees know you will do a thorough background check and reward employees for referring good tech people to hire.

In addition to these tips, I would add some of my previously recommended tips on fraud prevention that can apply here as well, including:

  • Conduct credit checks. Exercise caution in considering any employee in a dire financial situation.
  • Always prosecute fraud. Make it clear you have a no-tolerance policy.
  • Train your managers to pay close attention to their employees’ behavior and for any changes in that behavior. See More Red Flags of Fraud and The Red Flags of Fraud.

Sadly, threats to the wellbeing of your company can come from both internal and external sources. It’s worth the time and expense to make sure you are hiring ethical and honest tech employees.

 

 

Excuses for Fraud: Now We’ve Heard It All

Call it the lighter side of fraud, if there is one. As a follow-up to my columns on fraud prevention, I thought I’d share some of the more entertaining excuses people have given for why they committed some type of fraud.

One guy from Glasgow tried to use the soap opera defense. He claimed the investigators were really seeking his “evil twin brother” who lived in Pakistan about the identity and benefit fraud he was accused of. Wait, it gets better. He had two Pakistani passports with the same children listed on them. Seems his evil twin had children born on the exact same days with the exact same names. Wow, what are the odds?

This one could be called the “50 Shades of Grey” excuse. One man was collecting housing benefit money in Great Britain while working but hadn’t informed authorities. He claimed he owed money to his landlady. Her efforts to collect included wearing high heels, brandishing a prop similar to those in the movie and chasing him down for “payment in kind.”

How about the “I never got that raise” excuse? A bookkeeper was once denied a monthly raise of $100. He was angry and decided to help himself to the company till, stealing exactly $100 a month. For 20 years, until he retired.

Then there’s the CFO of a bank in Tennessee who tried the “It’s the tractors fault” excuse. The case study was reported by the Journal of Accountancy of the CFO who invested a lot of money in a local tractor dealership. He borrowed from his own employer to increase his investment and when the investment soured, didn’t want to admit to his employer that he was no good with his own money. So he began stealing from the bank, and by the end of the year had helped himself to $150,000.

He became so enamored of stealing money that when a customer accidentally paid a note twice, this guy just signed his own name on it and put it into his checking account. That was his downfall. He was caught when the customer noticed the duplicate payment and they tracked it to his account. He spent three years in prison.

And finally, the “My ego was too big to admit failure” excuse. That’s what Russell Wasendorf Sr., who was the owner and CEO of Peregrine Financial Group, said when he admitted he had embezzled an estimated $215 million with forged bank statements over a period of close to 20 years.

Wasendorf received all bank statements from US Bank and was able to make counterfeit statements and deliver those to the accounting department. He also made forgeries of nearly every document that came from US Bank and established a PO box to intercept paperwork sent by regulators.

In a signed statement, he said he began stealing when his business was on the verge of failing if it didn’t receive additional capital. “I was forced into a difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated.”

In 2013, Wasendorf was sentenced to 50 years in prison and was ordered to pay $215.5 million in restitution.

Don’t set yourself up to hear any of these excuses. Make sure you have adequate fraud prevention policies and measures in place. Check my previous columns on the topic and the chapter in my book, How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes. These excuses may be comical, but fraud is not.

7 Fraud Prevention Tips for Small Businesses

Last week’s post, More Red Flags of Fraud, discussed how management should be trained to always be on the lookout for behavioral changes in employees that may be red flags for fraud. As the column pointed out, 92 percent of the people who committed fraud exhibited certain behavioral traits. Recognizing those can be the key to detecting and preventing fraud.

Being aware of and dealing with fraud is crucial for any size business, but particularly for small businesses for three reasons:

  • They are disproportionately victimized by fraud
  • They are less likely to have fraud protection measures in place
  • There tends to be a greater level of trust in small offices

That’s according to the Association of Certified Fraud Examiners (AFCE). Small businesses, defined as those with fewer than 100 employees, suffered 28.8 percent of all fraud cases, with an average median loss of $154,000.

The average median loss was higher for the largest entities, defined as more than 10,000 employees, at $160,000. But obviously that is a much smaller fraction of overall revenue than for smaller companies.

So you’re a small business and can’t afford the most expensive fraud detection systems. But there are plenty of measures you can enact to cut down potential for fraud in your company. Here are a few suggestions.

  • Select the right employees. Always check references and criminal records. You may want to conduct credit checks to make sure your potential employee is not in dire financial straits, which can set the stage for him to consider committing fraud.
  • Separate accounting duties. Many small businesses delegate all the financial dealings to one person, who opens the mail, writes checks, reconciles the accounts and generates invoices. This makes a business vulnerable. If you don’t have the staff to completely separate duties, then have some of the responsibility rotate around the office if possible.
  • Always prosecute theft and fraud. Make it clear that you have a no-tolerance policy towards any type of theft or fraud and you will prosecute any and all people involved. This is easy to include in an employee manual. “If you steal, you will be prosecuted to the fullest extent of the law.” If the policy is equally applied to all employees, no one, even in a small office, should feel mistrusted.
  • Conduct surprise audits. Ask to see the books and review invoices and accounts payable. Call a few of the businesses to make sure they are legit and that your company is doing business with them. Or call your CPA in for an unannounced mini audit to uncover any problems.
  • Have your controller, bookkeeper or CFO take off two consecutive weeks each year. I recommend this measure to all my clients as a way to prevent and detect fraud. In their absence, do their jobs. Open the mail, review deposits, correspond with vendors.
  • Purchase the ACFE’s Small Business Fraud Prevention Manual. At $59, it’s money well spent. The manual goes into detail on how employees steal. It also gives prevention tips and how to deal with dishonest employees.

And as long as you are buying books, add my book to the list. How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes contains a chapter called “Stop Fraud Before It Starts” and includes ways to create an office fraud as well as tips on preventing fraud in all size companies.

You’ve worked hard to create revenue for your business. Don’t let anyone steal any of it from you.