Forensic accountants dig up the dirt in embezzlement cases

October 2, 2013

 

richard gordon

WAYNE DENNING/CVBJ
Lodi forensic accountant Richard Gordon helps build cases for small businesses against embezzlers.

LODI – Richard Gordon is an expert in forensics. No, not the kind you might expect to see on an episode of C.S.I.

Instead of blood and fingerprints, this Lodi accountant specializes in numbers and paper trails.

Gordon is a forensic accountant.

Certified as a public accountant (CPA) and fraud examiner (CFE), the owner of Gordon Forensics & Accounting uses math and investigative skills to document the crimes of white collar criminals.

“Normally a CPA is trained to look for fraud and come up with scientific or mathematical ways of proving certain crimes,” Gordon said.

One of those crimes is embezzlement.

“Embezzlement is where you entrust somebody with your property and they divert the property to their own use,” said Deputy District Attorney Stephen Taylor of San Joaquin County.

According to the 2012 Marquet Report on Embezzlement, the most popular embezzlement scheme last year was the issuance of forged or unauthorized company checks. The report also found that the average scheme lasted 4.7 years.

Marquet International, Ltd. – an independent investigative, litigation support and consulting firm – published its fifth annual white collar fraud study on major embezzlement cases in the United States in May.

The findings revealed that more than two-thirds of the crimes were committed by individuals who held finance/bookkeeping or accounting positions, and while women were the perpetrators in nearly 60 percent of the cases, male perpetrators embezzled amounts three times greater than their female counterparts, on average.

That is where forensic accountants come in. Gordon is the specialist small business owners call when they suspect embezzlement.

One such business owner is Lauri Merrill of Lodi Physical Therapy, the reported victim of an approximately $65,000 embezzlement case that is currently being prosecuted. After discovering suspicious activity and missing cash, Merrill hired Gordon to conduct an audit.

“I can’t recommend that enough,” Merrill said of hiring a forensic accountant. “Otherwise, it’s just my word against theirs. This way, he’s an objective third party and he knows what he’s looking for.”

Just two weeks after Gordon completed his report, the San Joaquin County District Attorney filed charges.

This is not uncommon.

“The majority of our major cases here, the case is filed within days of a CPA report hitting the DA’s office,” Taylor said. “The CPA reports are key.”

“Whether a case gets issued often depends on the forensic accountant that’s involved,” he added. “Businesses have to understand that the police are not going to reconstruct the records. They’re not going to examine the records. They’re not going to be accountants. They’re not going to come in and figure out how much money has been taken. They’re not going to do any of that.”

Forensic accountants, however, equip victims with a complete and unbiased report of the business’s financial history. They also function as independent witnesses who can testify in court.

Taylor has worked more than a few embezzlement cases in his over 30 years at the San Joaquin County District Attorney’s Office. Forensic accountants, he said, are also a crucial part of getting your money back, if you have indeed been victimized.

“The insurance company won’t pay for your audit, but they’re going to pay for the missing money, theoretically,” he said. They’ll pay it a lot faster if the CPA is handling the claim.”

The problem, Taylor said, is many people do not have embezzlement insurance and do not even realize that they have been ripped off until “the bookkeeper runs out the back door, and you’ve got the IRS at the front door.”

And punishments are not scaring anybody.

“People once went to San Quentin for a $50 bad check,” he said. “Now I don’t even think the DA will file for a $50 bad check, in most cases.”

Combine increases in violent crime and decreases in police staffing with prison overcrowding, and many white collar criminals may never face justice. This means small business owners must be that much more cautious and vigilant.

To protect yourself and your business from becoming a victim of embezzlement, follow these guidelines from Gordon and Taylor:

  1. 1.      Get embezzlement insurance and know the terms of the policy. Policies typically only cover employees, not outside contractors. You can also lose your coverage if you hire an employee with prior criminal convictions.
  2. 2.      Background check potential employees. Go beyond simply calling prior employers. Check court records. Be leery. Look for potential drug, alcohol, or gambling addictions.  It is a “we don’t judge” policy that Taylor said makes business owners fall victim.
  3. 3.      Segregate employee responsibilities. Install your own system of checks and balances. Do not allow the same employee to turn in the timecards and pick up the checks.
  4. 4.      Create a perception of detection. Make sure the owner is the first person to open the bank statements. Even if you do not thoroughly examine the records, Gordon said the illusion that you are will be enough to curb criminal activity.
  5. 5.      Encourage anonymous tips. Sixty-five percent of frauds are discovered through tips, Gordon said. Subscribe to an abuse hotline service that allows employees to anonymously call, text, email, or fax any sneaking suspicions they may have about their coworkers.
  6. 6.      Remember the fraud triangle. Embezzlers will have motive, opportunity, and a justification for their actions. “If those three things are present, that’s like the perfect storm for fraud,” Gordon said.

And Merrill has some advice of her own.

“It’s devastating to find out that a trusted employee was stealing from you all along,” she said. “I can’t stress that enough. The people who would do this are very good at gaining your trust. So, you can’t be too careful.”

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