This piece is dedicated to the memory of one of my dearest friends, Lisa M. Rose. Lisa, one of the globes most gifted and intuitive investigative professionals, passed away suddenly on July 13th, 2014 after a long and courageous health battle. She was an inspiration to all, an outstanding person and will be missed by everyone who had the privilege of knowing her. Rest in Peace Lisa.
Embezzlement is Devastating
Embezzlement is the kind of crippling financial punch that can bring your business to its knees or even knock it out. When hit by this punch, you either get up off the canvas or you’re out for the count. When you wake up in a daze, the fight doctor’s standing over you hanging the “closed sign” on your business door.
Sound farfetched? It may actually be more prevalent than you think. According to the U.S. Chamber of Commerce nearly 1/3 of all business bankruptcies are the result of employee theft.
What Are Your Odds of Getting Up?
What do you think the odds are that your business can sustain a large financial hit and the negative PR associated with it and still be operational? Certainly, we’ve seen some companies get up off the canvas after a major fraud event to resume fighting.
However, when fighters got hit by a great like Muhammad Ali not many got back up and certainly not many businesses can either.
Some of the companies, and non profits, that have gotten up off the canvas after being punched by an embezzler were likely only able to do so because they had insurance against embezzlement which is often referred to as a fidelity bond, crime coverage or an employee dishonesty policy.
Generally embezzlement coverage would take the form of “riders” attached to other types of business policies that a company could purchase. However, like other types of insurance, not every business buys the rider because few have reason to think they’ll need it.
Galvmet Steps into the Ring
I was reminded of the impact embezzlement can have on individual businesses (embezzlement can be fatal) recently when the following news story showed up about Galvmet:
“KANSAS CITY, MO—Tammy Dickinson, United States Attorney for the Western District of Missouri, announced today that a Kansas City, Mo., woman has been indicted by a federal grand jury for a nearly $3 million fraud scheme that forced her employer into bankruptcy.”
According to the U.S. Attorneys Press Release, the individual indicted was identified as Irene Marie Brooner, a “CPA who worked for Galvmet, Inc., a sheet metal fabrication facility and steel service center. At its peak in 2008, the company had 26 employees and $14 million in annual sales. Galvmet filed for bankruptcy and ceased operations in 2014. At the time of closing, the company had 18 to 20 employees and $10 million in annual sales.”
Galvmet Survives Recession but Gets Clobbered by the Embezzlement
While researching this piece, I stumbled across a 2013 story in the Business Journal about the impact that the recession had on Galvmet. As the story goes, the company’s sales were down in 2006 (impacted by the recession) as were other companies across the globe. Looking to survive, Galvmet’s owner, Ernie Ketchum, dug in and fought back making inventory changes to parts that were more profitable and in demand. While recounting this difficult time to the Business Journal, he said “I’m a Marine, so failure is not an option.”
The irony here is that despite a recession and the efforts employee’s put forward to stay afloat at that time, Galvmet was still in business in 2014 only to discover an embezzlement which ultimately was their demise.
Galvmet was hit by a big right financial hook and never got up off the canvas. In retrospect, the embezzlement appears to have been a larger contributor to the company’s demise than the recession.
This leads me to wonder whether the company could have survived the embezzlement’s impact had the recession never hit but that’s a question that we may never know the answer to.
Keeping Up with the Joneses
The motivation for embezzlement is often attributed to the embezzler’s need to live a lifestyle beyond their means, commonly referred to as “keeping up with the Joneses.” The Joneses could be your relatives, neighbors, or friends etc., anyone who is doing better financially than you are and possesses material things that you’d like to have or a social status you want.
While it’s never justified, embezzlers rarely use the money to fund things we’d all understand like the care of a sick child instead opting to fund a lavish lifestyle with their stolen booty. For a mind-boggling experience, take a look at what prosecutors allege Irene Brooner spent Galvmet’s money on over the years. It definitely wasn’t for the care of a sick child.
Embezzlement Often Involves Long-Term Employees
Studies suggest that embezzlement is often committed by “long term employees,” people who have worked for a company 7-10 years or more. Why? Long term employees are usually in more trusted positions, may have less oversight of their work, and know the company’s internal control environment inside and out. Employees who have worked for an employer over a long period of time can figure out how to circumvent or manipulate internal controls to their personal advantage.
The long-term employee factor holds true here as well as all indications are that the alleged embezzler, Irene Brooner, worked at Galvmet from 2001 until her termination in February 2014.
The longer a major fraud goes on the bigger the fraud potentially gets. It’s not unusual for an embezzlement to go two years before discovery and professionals consider that to be a long period of time.
The time frame that this embezzlement took place over is truly exceptional as it’s alleged by the U.S. Attorney’s Office to have gone on for 10 of the 13 years that Ms. Brooner worked for Galvmet.
The long time frame that this crime took place over points directly to significant financial control failures at Galvmet, which could have thwarted this crime from occurring had they been in place.
Title Means Nothing
In these types of cases, the employee’s title means nothing.
Irene Brooner was Galvmet’s Controller but embezzlement has been committed by a wide variety of employees trusted with financial duties including: C-Level executives (CEO, CFO, COO), Senior Management, Finance Officers, Accountants, Bookkeepers, AR employees, AP employees, Managers, Supervisors etc. The list is endless.
While we want to trust our employees, and long-term employees may have earned that trust, companies cannot simply ignore their fiduciary duties and revenue oversight responsibilities simply because an employee has worked for them for many years.
Prosecute or Learn to Spell R-e-c-i-d-i-v-i-s-t
One of the facts that’s troubling about businesses handling of embezzlement cases is that some companies choose not to go public with their accusations or refer cases to law enforcement or prosecutors for prosecution consideration.
While there are many reasons companies choose not to go forward post embezzlement (wash their hands of the problem), some of the more common ones involve: public embarrassment, bad PR, the requirement to testify about operational practices in open court (where everything is a matter of public record), shareholder issues, lack of confidence in the businesses ability to raise money and provide revenue oversight.
While the decision to not go forward against the former embezzler may be justifiable to many companies, the end result is that the failure to prosecute an embezzler greatly increases the odds that they will head down the road and do the exact same thing to another business.
The Bottom Line – Trust but Verify
Trust is one thing but verification is another. I discussed the employee trust factor in a piece I wrote for CommPro titled The Revenue Drain – That “Sucking Sound” is Lost Revenue: Trust Your Employees…But ALWAYS Verify.
Added verification procedures, having multiple employees involved in all financial transactions, random (unannounced audits), dual signatures, document reconciliation, job rotation and increased due diligence are several of the keys to preventing this kind of significant fraud event from happening at your company.
The bottom line however is that you cannot simply turn over the keys to your books to someone, walk away and blindly trust them to “do the right thing” while you’re focusing on other tasks because oftentimes they won’t.
So, what are the odds your company will survive a large-scale, multimillion dollar embezzlement like this when it happens? Will you get up off the canvas or are you “lights out” and going down for the count?!
Take the proper internal control steps to prevent embezzlement from happening and hopefully you’ll never have to find out.
Those are my insights. What are yours?