Church Ladies Passing the Plate – to Themselves

Many ladies of the church devote countless hours of volunteer work to their congregations — arranging flowers, planning weddings, cooking food for gatherings and doing whatever it takes to service their congregations. But it seems that some of the ladies who work at the church are involved in another not so helpful activity. Stealing.

In my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes,” I tell the story of the church bookkeeper who stole money from one church and after being caught, moved to another state and stole millions from that church as well. Seems she is not alone.

Sharon Warunek won’t be going to her job at the Diocese of Scranton in Pennsylvania any longer, after working there for 27 years. As office manager of the church’s Society for the Propagation of Faith, she opened all the checks people donated to benefit the poor. Instead of passing the money along to those who need it most, she instead used at least $340,000 to cover her monthly Discover credit card bill.

Jerri S. Hunter of Virginia managed to embezzle half a million dollars from the Chester United Methodist Church over the course of six years and faces 14 counts of embezzlement. And she wasn’t even caught while she worked there. After she was fired for an unrelated charge, volunteers who were handled tasks she previously performed found discrepancies in the numbers.

Although the Hilltop Lutheran Church in South Bend, Indiana, only had 120 members, the secretary and treasurer Jane Loprest managed to steal $119,000 in the eight years, taking it upon herself to double and triple her pay. She was smart enough to manage the accounts so the church was never overdrawn. Using surveillance photos from the church’s bank, postal inspectors determined she was writing checks but never issuing them, instead cashing them for herself. She is serving a year and a day in prison. At least she said she was sorry.

Sadly, ladies stealing from the church could form their own church circle — and have quite a few members. One out of eight fraud schemes involves a religious organization or other non-profit. And most of the thefts are committed by women.

The gender gap is fairly easily explained when you consider that women handle most of the bookkeeping jobs in the United States. They are the ones with access to the money. The Bureau of Labor Statistics reported that in 2010, 90 percent of the bookkeepers in the United States were women.

But why churches, religious organizations and non-profits? These are the more vulnerable organizations. They have “have very weak control systems. They’re not operating on big budgets that allow them to spend money on accountants,” according to Chris Marquet, CEO of Marquet International, a security firm based in Boston that tracked worker embezzlement schemes over the past five years.

The lesson here is not to be suspicious of the kindly lady at the reception desk or the office manager at your church office. It’s a lesson for anyone that owns or runs a business, particularly a smaller one that doesn’t have an accounting department. Always take a look at your books and institute controls on financial transactions. Don’t make anyone even attempt to violate the seventh commandment with your business’s money.

Look for me November 10 at 4:30 at the Book Festival of the Marcus Jewish Community Center of Atlanta. I’ll be discussing my book,  ”How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.” The event is free and open to the public. Click here for more information.

Employee Tips Key to Fraud Prevention

The simple slogan, “If You See Something, Say Something ™” was first used by The New York Metropolitan Transportation Authority to raise public awareness about terrorism, and later licensed by the Department of Homeland Security (DHS) for a national campaign.

You may have seen some of their public service announcements that urge people to report suspicious activities to local law enforcement or in the case of an emergency, call 911.

I urge companies to institute a similar campaign to help them fight fraud. According to the Association of Certified Fraud Examiners (ACFE), the most common way internal fraud is detected is receiving a tip from someone. While many of these are received from employees, some come from customers, an anonymous person or even outside vendors who notice something not quite right. Just over half of internal frauds are detected with tips, according to the ACFE’s 2012 Report to the Nation on Occupational Fraud and Abuse.

if-you-see-something1In my career as the Turnaround Authority, I’ve uncovered fraud in all types of ways — through audits, following up on suspicions I had, or in one memorable case, installing fake cameras (until the company could afford real ones) to stem the problem of inventory walking out the door. But employee tips have also helped me uncover millions of dollars of fraud.

When I am working with an out-of-town company, I assure the employees that no one will lose their jobs for sharing information with me. Later I will drop into casual conversation the name of hotel where I’m staying. Then I ask them for restaurant recommendations around that hotel. I do this so they know where they can find me outside of the office if they wish to share sensitive information.

Once, in the middle of the night someone pushed a bunch of USB drives under my floor. The drives detailed where the company’s money had gone. I’ve also had file folders with documents with valuable inside information pushed under my door. Some people in hotels just wake up to a USA Today and a bill. I never know what surprises I may get!

Companies should have fraud awareness training for managers and employees. The ACFE recommends these programs include what actions constitute fraud, how fraud hurts everyone in the company and how to report any suspicious activity.

Frequent communication is critical to letting employees understand that the company is dedicated to fraud prevention. This can be done at meetings, in newsletters and on the company website. It is also important to let them know, as I always make a point of doing, that employees will not lose their jobs if they report something suspicious. They must feel protected from retaliation.

Many companies successfully use hotlines where employees can make anonymous calls. They can also set up an online reporting system.

Early detection is crucial to cutting the cost of fraud. The ACFE reports that the average fraud scheme lasts about 18 months before discovery and that U.S. businesses lose more than 6 percent or revenues each year due to fraud.

In my next column, I’ll talk about the behavioral red flags that are often associated with fraudulent conduct. What should you be looking out for?

Fraud is Everywhere

Readers of this blog and my new book, “How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes,” tell me they especially enjoy my stories about fraud. I have plenty more where those came from.

Fraud is everywhere, and not just at the multi-million dollar corporations I deal with. Anywhere you’ll find money and people with access to that money, you’ll find fraud. Parents even steal from organizations their children are involved with. Nobody, and no group, is immune to fraud.

Here are just a few recent examples, including the first one that appeared in the newspapers today.

• A former guidance counselor and assistant principal in the Memphis City Schools system made $120,000 from a scheme he ran from 1995 to 2010 that involved him helping teachers cheat on their certification exams. They paid him $3,000 and he paid test takers a couple of hundred to take the tests on their behalf. He was sentenced to seven years in prison.

• A New York socialite got 19 months in prison for swindling corporations out of at least $20 million. She asked CEOs to give her free and discounted goods that she said she would distribute as samples and promotional packages in her supposed large network of retail establishments and other outlets to increase sales. Instead she sold the merchandise for profit.  She funded almost 200 investment accounts and purchased expensive art with the money she stole.

• An Australian man stole $20 million from his company over a 12-year period by paying almost 300 invoices to a fake supplier that he had set up. He used his ill-gotten gains to buy racehorses, motorcycles and boats and gifts for young women he found while trolling “Sugar Daddy” websites. He pled guilty and was sentenced to 15 years in jail.

• A dentist in Toronto even swindled his mom in a Ponzi scheme that netted him $40 million. He used the money for personal expenses and paid off credit cards. I hope he at least bought his mom a nice Mother’s Day present.

• A PTA president in Atlanta made news when she was found to have stolen $57,000 that was meant for the PTA at her child’s school. Instead of depositing checks in the PTA account, including several donated by a local church, she deposited the funds into a bank where she worked and was also a co-owner.

• The Girl Scout motto is “Be Prepared.” But they weren’t prepared for this. A Girl Scout troop leader in California stole $6,000 of the proceeds from her scouts’ cookie sales by misusing a debit card tied to the account. She spent the money on buying gas, getting her nails done and purchasing items at Nordstrom and Victoria’s Secret. Seems she had quite a secret of her own.

I’ve said it before and I’ll say it again. Any time there is money involved, you must have checks and balances and review who has access to that money. Go by the scout motto and be prepared.

Low-Tech Fraud Thrives in High-Tech Era

Some things never go out of style. Take all kinds of fraud, for instance. Even in the era of increasing high-tech fraud committed on the Internet, good old-fashioned low-tech fraud is here to stay.

Just this week I read about three cases in the news that involved fraud of the low-tech variety. People stole millions of dollars with nary a click of a mouse.

The ironically named Angel Food Ministries was in the news again because the founders of the now-defunct faith-based non-profit that provided low cost food through a network of churches and civic organizations pleaded guilty to federal charges.

The indictment, which was a whooping 71 pages, included allegations that pastors Joe and Linda Wingo and their son Andy took kickbacks from vendors, used ministry credit cards for personal purchases and trips to Vegas and New York, and used ministry bank accounts for their own benefit.

Staten Island deli king Saquib Khan took the concept of check kiting to a whole new level

Staten Island deli king Saquib Khan took the concept of check kiting to a whole new level

It’s hard to understand why the pastors needed to treat the ministry’s accounts as their own when they were paying themselves $2.5 million in executive and family compensation. I guess angels have a lot of expenses and those wings won’t fly them all the way to Vegas.

Another case of low-tech fraud in the news involves postal workers with sticky fingers. Remember how your mom told you never to send cash through the mail? Well, these folks were stealing more than $10 bills tucked inside little Susie’s birthday card.

Gerald Eason and Deborah Fambro-Echols stole more than 1,800 tax refund checks, Social Security and veterans’ benefit checks in Georgia for the past four years while working at the Atlanta Processing and Distribution Center. They recruited some equally unethical people at banks and businesses to cash their stolen checks.

They’ve been sentenced to jail and fined, as have some of their equally shifty cohorts who cashed the checks.

My favorite story involves Staten Island deli king Saquib Khan, who committed fraud to the tune of $82 million. That’s no bologna, no matter how you slice it.

Trained as a doctor in his native Pakistan, Khan moved to the U.S. in the 1980s and wound up working with his sister and brother-in-law in the deli business. He then founded Richmond Wholesale Company and owns three delis of his own. Sales last year for the cigarette and grocery business were $125 million.

After Hurricane Sandy caused his business to encounter financial troubles, Khan put that creative entrepreneur mind to work and devised a scheme that involved writing hundreds of worthless checks to himself, then depositing them in accounts in several banks under his name or in one of his businesses names, and withdrawing money.

In just two weeks in November he wrote more than a dozen checks a day to himself, drawing from accounts at six banks. Several lawsuits are pending against him and he is trying to pay the money back, which may involve selling his business. Khan may have sliced his last salami.

No matter how technologically advanced our society becomes, low-tech fraud will always be with us and cost corporations billions of dollars a year.

That’s why I devoted an entire chapter to fraud in my new book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs Mistakes,” with tips on how to prevent it and what to do if it occurs. No matter what business you are in, or how big it is, you are susceptible to fraud.

And remember, mom was right. Don’t send cash through the mail.

Why I Know Voltaire & Rousseau Weren’t Savvy Business Owners

Lying is hardly a new phenomenon. The Bible tells us the first lie ever told was in the Garden of Eden, when the snake lied to Eve to manipulate her to eat the apple God had forbade her to eat. And look how that turned out: apparently horrible child bearing pains, a ton of farming and a lot less Eden.

Recently the Scrabble Tournament world — yes, there is one — was rocked by a cheating scandal when a young player was disqualified in the national tournament in Orlando when he pocketed blank tiles.

More than 125 Harvard students were accused of cheating by allegedly working together on a take-home exam after being instructed to work alone.

Cheating at Scrabble? And Harvard, the highly revered alma mater of more presidents than any other university? What’s next? Did Mr. Rogers never pay his income taxes?

The press will probably spend a lot of time debating and analyzing whether dishonestly is on the rise among young people. They may blame it on societal problems and the dissolution of the family, or perhaps the pressure put on youth. They may blame the well-publicized, poor examples adults are setting.

Athletes take illegal, performance-enhancing drugs (the most recent case being once-7-time Tour De France champion Lance Armstrong). Journalists fabricate quotes. Money managers steal millions from their clients.

As the Turnaround Authority, I’m not all that interested in exploring the reasons people cheat, lie, embezzle and commit fraud. Jean-Jacques Rousseau thought people were born innately good and turned corrupt through forces of society. Who knows? I’m not hired to delve into embezzlers’ childhoods or wax philosophical.

The important point for my clients is to make them recognize that not everyone is honest. People lie on their résumés to get jobs, then commit fraud or embezzle once they have them.

Some business owners assume their employees are trustworthy. They have what I call the Candide syndrome. In Voltaire’s satiric novel, despite suffering numerous tragedies, Pangloss persisted in his belief that this world is “the best of all possible worlds.”

Our world needs optimists. Heck, if it weren’t for optimists, our country’s founders would never have risked their lives sailing over the Atlantic in search of a better life.

It’s nice to believe that man is innately good and trustworthy and that this is “the best of all possible worlds.” But as a business owner, that’s a luxury you literally can’t afford. You always have to be on alert to the possibility of embezzlement, fraud and theft.

No matter your business, always watch your back door and keep your eyes open.

What’s really going on at your company?

My Recent Trip to the Michael Hart Show: Lessons in Fraud

I recently had my second guest appearance on the Michael Hart show. Michael and I had a rousing conversation about Fraud and other things that business leaders can do to protect themselves from making the mistakes of past CEOs.

I hope you enjoy these links, which will allow you to listen to the two segments of the show.

Lee Katz Part One

Lee Katz Part Two

There wasn’t a lot of time for call-ins or listener comments, but I’d love to know what you think and if you have any questions or comments.

13 Fraud Prevention Tips

My last 13 posts have been specific tips designed to help you do a better job preventing fraud at your company. My hope is that by calling your attention to the variety of ways that people commit fraud and by sharing these anecdotes you’ll be proactive in putting in place checks and balances and sticking to the kind of no-nonsense fraud prevention policies that keep businesses healthy and safe.

Let this post serve as a reference for each of the 13 Fraud Prevention Tips I’ve offered, and please feel free to add your own.

1. If Someone Commits Fraud, Have Them Thrown in Jail

2. Leverage the Value of an Informal Fraud Policy

3. Fraud Prevention Tip: Keep Your Security Room Locked

4. Always Have Someone Double Check the Payroll

5. Change the Standard by Which You Check Your Transactions

6. Don’t Rehire People Who Steal From You – Seriously

7. Focus on Checks and Balances that are Rechecked and Rebalanced

8. Take All Shortages Seriously

9. Always Poke Around Your Books

10. Regularly Monitor and Review Monetary Trends

11. Match Your Purchase Orders Against Your Invoices Before Putting the Invoices in Your System

12. Think About the Financial Impact of Rare Events on Your Business

13. Trust Your Instincts

Someone asked me why I did so many posts on Fraud Prevention that they ran right out of March – Fraud Prevention Month – and all the way to the end of April. As I mentioned in my very first post about fraud this year, preventing fraud is a year-round process. You need to be vigilant all the time, building a system that is internally monitored – and that monitors the monitors.

Please let me know what your fraud stories are, what tips you’d add to my list and how you prevent fraud.

Fraud Prevention Tip: Trust Your Instincts

Without trying to justify anyone’s overactive imagination and undue since of paranoia, I want to finish my series on fraud by providing you with one last fraud tip: trust your instincts.

That’s not a reason to go firing people without evidence, but if you think that something fishy is afoot, trust your instincts and investigate further. It’s your business – or at least it’s in your charge – and you don’t have to feel guilty about questioning processes, transactions or people.

I recall a manufacturing company in Columbia, SC that was making a dress line for an outlet mall chain. The president of the company had a nasty gambling habit and owed the mob several hundred thousand dollars from Atlantic City gambling debts (I was brought in because he took his eye off the ball). To pay his debt, he was operating some special sales on nights and weekends when the plant was closed. He would simply pull a truck right up to the warehouse, load merchandise onto it and sell it to the mob at a discount; they would apply that against his debt.

All of a sudden our shrinkage went way up, and I had to figure out what happened – but I couldn’t. To date he had been a good president, and he ran a tight ship. I couldn’t figure out what it was that was ravaging the shrinkage numbers, but something wasn’t sitting right with me, and even though it seemed dramatic, I had to trust my instincts. Thus, I hired a private detective to spy on the warehouse just in case there was something I was missing. I expected to find some miscellaneous and uncoordinated left that I was just otherwise missing, but what I learned was the magnitude of the operation going on behind my back.

As in all fraud cases, I’m glad I trusted my instincts and hired a private investigator. And that’s the advice I want to leave you with regarding fraud: trust your instincts.

Have you ever trusted your instincts only to find exactly what you feared? Have you not trusted your instincts to your detriment?


Fraud Prevention Tip: Think About the Financial Impact of Rare Events on Your Business

The smoothest kind of scam – and one of the hardest to detect – is what I call an off-book transaction.

Just a For Instance

An off-book transaction most often happens because something rare occurs at your business. Let’s say, for instance and hopefully not, that there’s an extraordinary event like a fire or a theft, and you go to the insurance company claiming $25,000 in damages and loss.

All goes well (at least in this regard), and the check is sent.

The check could have been sent to any number of people’s desks, but as this is a particularly unusual event that involves insurance, the check is sent to the CFO’s desk. Now, the CFO takes the check and deposits it – not into the company’s normal account – but into an account at a different bank under your company’s name. There’s now $25,000 sitting in a bank account in your company’s name, but only the CFO knows its there to control and spend.

How can he get away with this?

These extraordinary non-recurring items are things that an auditor would never know missed the books. Nobody knows to look for what isn’t missing.

And this doesn’t just happen with insurance checks. Off-book fraud happens with rebates, SPIFs (Sale Performance Incentive Plans), or other money that is rare enough that accountants and auditors don’t know to check the books for it.

The Rebate Way

Consider the idea of a pre-purchased rebate. One large printing company I turned around used to buy a lot of paper. In fact, it bought millions of dollars in paper annually (millions is an understatement). So a new paper manufacturer comes along and says that if this printing company signs a contract with them that begins with a $100,000 paper purchase, the manufacturer will give a one million dollar signing bonus.

The details of this contract are only known by one person who also knows that the million dollars should be looked for in the books later. Since he’s the only one who knows and he accepts the check, he’s able to do exactly what the CFO mentioned above could do: deposit and control it. Auditors don’t know to look for it, so they never find it.

I caught this case because I felt compelled to review a contract that represented such a large percentage of expenditures, and I wanted to know more about the deal, but for every huge case that is inevitably caught there are ten other $10,000 deals that get missed.

If I’m around a company long enough for things happening on an annual cycle to recur then I’m more likely to catch these things, but if I’m not then it’s up to people at the top to alert the auditors (and more than one of them, mind you) to be on the lookout for rare, one time or merely annual occurrences that could be slipping the books.

The way I often catch off-book transactions is by noting what I’m told by staff must absolutely be done or absolutely not be done; I always investigate what must or must not happen to see if something unsavory is going on. A good bit of the time, it is.

A Smooth Insurance Scam

For instance, I had a controller who would intentionally overpay insurance premiums. He was writing, periodically, a check for $10,000 or even $20,000 more than he needed to be. When the auditors came in, they would see regular checks to the insurance company and not think a thing of it. At best, they would spot check that this company was owed money, and the short answer was always yes.

The insurance company would later send a refund check to the company and the controller overpaying those checks would deposit the refunds into a dummy account at a different bank under the business’s name. Guess who was the only person who knew about this account and spent from it. Yep, that very same controller.

People will take advantage of what they know will be out of site out of mind, so I encourage you to watch the unusual with your own eyes and always follow it from start to finish.

What kinds of unusual transactions occur in your business? Did you check up on them?


Fraud Prevention Tip: Match Your Purchase Orders Against Your Invoices Before Putting the Invoices in Your System

Let’s talk about Accounts Payable. We have a tendency to put certain processes on auto-pilot because it’s much easier that way, and accounts payable is one of those. It’s not because whoever is doing your payables isn’t paying attention – it’s because he or she is only one cog in the ordering wheel. She’s not counting incoming shipments and matching POs to packing slips at that point. She’s not the purchasing officer (in larger structures), so she’s just receiving and then paying invoices, which she likely presumes have already been accounted for. That’s not to say that there aren’t some processes in place to prevent this from being haphazard, but there is room for error and exploitation.

I recall a case in Jacksonville, Florida. The purchasing agent and the controller were working together on a little scheme. They worked for a company that was buying 100 railroad cars a month, each holding 20,000 gallons of oil. That’s 2 million gallons of oil annually, which is a pretty huge volume.

What the controller and purchasing agent figured out how to do was effectively double-invoice for one of these railroad cars filled with oil. They’d effectively divert a purchased car to one of their competitors willing to pay for a discounted car of oil. The company that ordered the car initially paid for the car in full when they received their invoice, and when this pair invoiced the competitor at a discounted rate, the competitor would split the cost of the invoice with them.

The people getting most ripped off in this case were not ones that the controller and purchasing agent worked for, but the companies they were unjustly invoicing.

This would have been caught much sooner had any of those companies been matching its delivery tickets and purchase orders before processing its invoices in its accounts payable system. Once an invoice is in the system it’s on auto-pilot, which is why you have to be sure that you’re checking all incoming shipments against purchase orders to make sure you’re paying for the right things.

That’s a good practice anyway, and most of the time you’re at worst just catching honest mistakes made by your vendors. Sometimes, though, you’ll find something like this and be really glad that you have a fraud control policy that entails checking purchase orders against incoming shipments and against invoices before putting them into your systems.

What’s your process for checking these things? Have you ever uncovered mistakes or worse?