theft & deceit (jun 2014)

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JUNE 2014 • PRINTACTION • 11

he printing industry is continually

plagued by cases of employee fraud. During

the five years I managed the

Ontario Association of Quick Printers, I was

surprised by the number of small business

owners who confided that at some point their

company had been defrauded out of

ruinous sums by staff – often a long-term

employee whom they thought they knew

well and trusted...



12 • PRINTACTION • JUNE 2014

Cases of staff fraud at printing compa-nies reported in just the past 12 months, include:

�Michael Britt, 31, charged with 13 counts of forgery occurring over more than five years and resulting in the theft of over $1 million from Gene-Del Printing, the Brentwood, Missouri company co-owned by Britt’s mother and three partners. Britt allegedly wrote at least 166 unauthorized cheques to himself using forged signatures of two of the company’s owners, fabricated fraudulent invoices for the cheques, and made at least $25,000 in unau-thorized purchases on a company credit card.

� Christina and Brian Russo, a married couple, both in their 50s, charged with stealing more than $657,000 from Harmony Press of Easton, Pennsylvania. Christina Russo al-legedly wrote hundreds of unautho-rized cheques to her husband and herself using a rubber stamp with the owner’s signature.

� Leona Gebhart, the 70-year-old for-mer comptroller of Henderson’s Printing in Altoona, Pennsylva-nia, charged with stealing at least $151,130 over 11 years by alleged-ly writing unauthorized company cheques to herself (including du-plicate and triplicate paycheques), manipulating petty cash, and falsi-fying documents, while allowing the company’s Federal tax payments to become delinquent.

With all these past and present horror stories in mind, I spoke to Robert Fowlie and David Malamed, forensic accoun-tants at leading Toronto financial and business advisory firms, and Detective

Constable Keith Nakahara of the Hal-ton Regional Police Service Fraud Unit (Commercial Team) to learn what print-ers can do to protect themselves from devastation by employee fraud.

How employee fraud worksNakahara’s region of Ontario, including the towns of Oakville and Milton, has one of the highest per capita incomes and one of the highest rates of fraud in Canada. He observes that business fraud-sters have no particular motivations or characteristics in common except that they have too much control with too lit-tle supervision – a position that creates overwhelming temptation for some peo-ple. “Don’t automatically assume you can trust somebody based on a family connection or the length of time you’ve known them,” he warns. “In business the most common fraud we see is commit-ted by a person in a position of trust with limited oversight, typically a bookkeeper or accountant who has a certain amount of control over what facts get released, so the fraud may go undetected for years.”

Both Fowlie, a partner at Deloitte LLP, and Malamed, a partner at Grant Thorn-ton LLP, have long strings of credentials after their names certifying them as fraud experts. Besides investigating alleged cases and preparing financial information for use in court, they also work proactively to establish preventative controls.

Both say smaller print shops are more susceptible to fraud than larger compa-nies if their smaller staff count results in less separation of duties. In other words, the person writing the cheques may be the same person reconciling the bank accounts and doing the accounting, so he or she can readily conceal bogus pay-ments to themselves or fictional third parties.

In billing fraud, phony vendors may

get paid, or an individual working in procurement for a company starts his own business, buys raw materials at cost, marks up the prices exorbitantly, then sells the materials to the company he works for. In payroll fraud, wages may be paid to a fictitious employee or some-body who was terminated still gets paid via deposits to an account controlled by the fraudster.

Verify bank and accounting recordsFowlie and Malamed say a good way to detect fraud is for owners to obtain their bank statement directly from the bank and review it monthly (or else delegate the review to an internal third party knowledgeable and reliable) to ensure that each payment and vendor is legiti-mate. They also recommend comparing your list of vendor and delivery addresses with your employees’ addresses and reg-ularly reviewing the payroll journal that

most companies submit to an external third party for processing.

“In a recent trial we uncovered that, even after review and approval of payroll information, a clerk was still able to make changes by adding payments to herself and terminated employees to an account she controlled and make accounting en-tries to cover up these payments,” warns Fowlie. “Our clients thought they were in control when in fact the process was not operating as they intended.”

Nakahara suggests that the notes in your company’s year-end financial re-porting may also identify specific items of concern: “For example, ledgers that don’t match bank payments and the bookkeeper’s explanation dismissing the discrepancy as a computer glitch may warrant closer investigation.”

Expenses, consumables and chequesAnother big area of concern is employee expense accounts, says Malamed: “Ex-pense fraud is epidemic among all or-ganizations. It’s the number-one trend I see.”

Fowlie explains: “In today’s tougher economic climate, some families have gone from two to one income or ex-perience no growth in income against growing expenses. Under new financial pressures, some people feel forced to do things they have not done before. Per-haps this is one reason we’re seeing an up-tick in fraudulent employee expense claims involving false documentation or duplicate claims.” He warns that Web-sites even exist where users can print out receipts for fictitious claims.

As a remedy, he says companies must check every detail of expense claims sub-mitted by employees and require each item to be supported not only by legit-imate documentation but also within business rationale.

“Another form of fraud happens if I cook and sell steaks in the restaurant where I work, then pocket the customer’s money because the owners don’t know they were sold,” says Malamed. “This type of transaction is also possible in



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the printing world, where press or pre-press operators could be running their own jobs on the side using the owner’s resources.” Since consumables like toner, ink, and paper are expensive and highly transactional, he thinks there could also be a secondary market for them.

One preventative measure he suggests owners can take is to project what the company’s sales should be based on con-sumption of supplies. If either the sales or the supplies in stock fall short, they need to investigate why.

“Don’t get carried away with the busi-ness and forget to look at the numbers,” he insists. “The numbers tell the sto-ry. Perform your own analysis to see if things add up.”

Typically, in cheque fraud the names of payees or dollar amounts on cheques are changed, or duplicates are issued of the same cheque. “Usually cheques are numbered sequentially, so if number 005 shows up a few times, it’s a red flag,” says Malamed. (Red flags are warning signals that deviate from correct practice and may point to the presence of fraud.)

Fowlie says organized criminals commonly perpetrate a counterfeiting scheme by intercepting a company’s cheque in the mail and taking it to a printer to obtain fake blank copies. Then they write the fake cheques to third par-ties, who cash them and return some of the proceeds to the organized criminals.

“This is the reason why in Europe pay-ment is typically arranged through wires and direct transfers to avoid cheques be-ing intercepted and compromised and counterfeits being written against the ac-count,” explains Fowlie. “Some of my cli-ents have lost millions of dollars through this type of scheme because they didn’t monitor their accounts closely or were unprotected in terms of the way their ac-count was set up.”

As a preventative measure, banks op-erate something called Positive Pay pro-grams in which companies pay the bank a fee (something like 20 cents) per cheque and provide the bank with standard in-formation on cheques they issue like cheque numbers, payees’ names, and dol-lar amounts. If the information written on a particular cheque differs from their records, the bank will hold the cheque and notify the company. “Some compa-nies think the cost of a Positive Pay pro-gram is too expensive; however, if you’re lacking in segregation of duties, it may be the least expensive way to handle the problem of cheque fraud,” says Malamed.

Staff and hiring issuesNakahara says before hiring any em-ployee in a position of financial trust it is important to have the person sign a pre-employment contract that clearly delineates the basis and limitations of the job. He explains that fraud is the crime of obtaining money or some other benefit for the perpetrator or someone else by deliberate deception. Thus, to prosecute fraud, police need evidence both of a theft and of the deceit the fraudster used

to commit it.He says a lot of cases get thrown out

of court because the fraudster claims that the business owner knew about and approved the transactions in ques-tion. Without corroborating evidence on either side, the case boils down to the fraudster’s word against the own-er’s and is likely to get tossed. Thus the pre-employment contract should specify

that: (1) the person will not gain by any transaction without the knowledge and consent of the owner, and (2) the own-er’s approval of any transaction must be stated in writing.

Additionally, before hiring accounting and payroll personnel, Fowlie advises owners to call their former employers. If, for example, his client’s company had checked on the payroll clerk mentioned

earlier in this way, they would have learned she was charged by the RCMP for doing the same thing at a previous employer’s company.

But Nakahara says doing systematic police background checks on prospective employees only provide a false sense of security: “The checks only reveal when people are convicted, not charged, and for various reasons conviction rates are


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low in comparison to the larger number of people who are actually committing fraud. So no amount of front-end due diligence can replace ongoing due dili-gence in a business operation.”

Fowlie says due diligence should in-clude remaining alert to changes in staff ’s behaviour and financial well-be-ing, such as someone suddenly living outside their means. Additionally, he says people involved in fraud often do not take vacations to prevent their fraud from being detected; so refusal to take vacations is often a red flag.

If you suspect fraudFowlie encourages businesses to review their insurance policy with their broker or insurer to make sure it includes cov-erage not only for fraud, but also for fees for a forensic accountant to conduct an investigation on their behalf, if necessary.

If you suspect someone of fraud, he says it is not prudent to confront the individual straight away. Rather, you should first conduct an investigation and strategize about what is to be done. “I have seen companies accuse and fire longtime employees, only to discover the problem was not fraud but careless ac-counting,” he cautions.

If an investigation substantiates fraud, Nakahara advises owners to be aware that perpetrators usually plan an es-cape, so that even if they are removed from their job, they can still continue to defraud the company. So the most appropriate course of action is not only to remove the person from the job com-pletely, but also to notify your bank and other financial institutions that the per-son no longer has the authority to trans-act business for your company.

Nakahara also recommends you let the fraudster know you have gone to the police, which might make them stop robbing you of more money or prompt them into a legally useful verbal response – something police call a “spontaneous utterance” – such as an admission of guilt or an offer to pay you back the sto-len money, which you should carefully make note of.

As the victim, you can also file a com-plaint with the police, usually in the dis-trict where you work or reside. In fact, to pay out on a crime insurance policy, most insurance companies require police to lay criminal charges to validate that the fraud has occurred with reasonable probable cause. A subsequent criminal conviction on the charges in court gives the perpetrator a police record which may prevent the person from repeating the offence at other companies.

Sometimes, if a business is not covered by insurance for fraud, or insurance does not cover the entire loss, the owner may also elect to pursue a civil lawsuit against the perpetrator to try to recover stolen money. In this event, Fowlie says forensic accounts are often enlisted to investigate the fraudster’s assets to determine how much recovery might be possible.

Fraud risk assessmentFowlie points to statistics from the global Association of Certified Fraud Examin-ers (ACFE) showing that some business-

es are defrauded as often as every two to three years. And because prevention costs are generally lower than the cost of a fraud investigation, he urges businesses to become proactive about prevention.

Malamed concurs: “Prevention is my key focus. Every dollar you spend on prevention saves $10 or $20 on reaction – not including dollar loss. If there’s one message I want to scream from the top of buildings, it’s ‘Put preventative tech-niques in place!’”

One thing a business can do is hire a forensic accountant to conduct a fraud risk assessment of its operations, which reviews all of the company’s activities to determine the types of fraud it is ex-posed to and develops preventative in-ternal controls.

As with legal fees, you pay for the consultant’s professional expertise, so the cost of a fraud risk assessment can be high. But Fowlie explains: “Like law-yers, most forensic accountants will first meet with you for an hour to understand your business and prepare a quote on how much time and money will be re-quired to assess the entire organization. Some will also help figure out a budget that will work for you, since it is possible to perform the assessment in stages, one division or function at a time. You can start with the most vulnerable area the first year, then assess the rest over time.”

Awareness training and whistleblower programsMalamed suggests two more important anti-fraud services available from com-panies like his, which are affordable to small- and medium-sized companies: fraud awareness training and whis-tleblower programs. Fraud awareness training educates employees, owners, and stakeholders on how to identify red flags. A whistleblower program enables employees to anonymously point out in-stances where potential fraud exists.

“For example, in one investigation, I asked the employee I was interview-ing: ‘Didn’t you find it unusual when the manager asked you to make journal entries on Friday nights and Saturday mornings instead of during regular busi-ness hours?’” recalls Malamed. “With awareness training, the employee would have realized this timing was a red flag, and a whistleblower program would have given him a way around his feelings of discomfort about questioning a man-ager’s orders directly.”

Malamed says research by ACFE shows that over 40 percent of fraud is identified by tips. Giving employees a way to report it without worrying about backlash increases the odds of detection. ACFE statistics also show most fraud take about 18 months to identify and re-sult in an average loss of $140,000 over this time. But for companies with con-trols in place like awareness training and whistleblower programs, detection time goes down from 18 months to nine months and average loss from $140,000 to $77,000.

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theft & deceit (jun 2014)

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