This Week
  • Buckingham, Morgan to buy Midtown facility for $5M

  • Online training proving effective at area companies

  • CEO Sameer Penakalapati has grown Avani Technology Solutions

  • Repeat business drives dealership's sales.

  • Chiropractor Melinda Houle helps clients adjust.

  • The Health Care Achievement Awards 2017 supplement.

Employers need to know warnings signs of fraud

Rochester Business Journal
May 2, 2014

If your company’s bookkeeper makes $25,000 a year and arrives at work in a new Mercedes, it’s possible the firm is a victim of fraud.

The warning signs might not always be as obvious as an employee living beyond his or her means, however. For that reason, businesses must take measures to combat fraud and draw on experts such as forensic accountants and certified fraud examiners who can scrutinize their business practices and recordkeeping to keep embezzlement and fraud in check.

The Association of Certified Fraud Examiners estimates that the average business loses 5 percent of its annual revenue to fraud.

Susan Desino, a director with DeJoy, Knauf & Blood LLP, says there is no shortage of employees, vendors, hackers and outsiders looking to defraud a business today, and there are new and innovative ways to do it in an era of IT dependency. Drug addiction, health problems, financial pressure and rationalization are common factors in cases of theft.

Timothy McPoland, a certified fraud examiner in the Buffalo office of Freed Maxick CPAs P.C., says gambling is the biggest one.

“There are casinos right and left in New York State,” he says. “The majority of frauds we investigate are because people have a gambling problem and steal from their employer to gamble.”

Desino says forensic accountants can help with detection and with installation of effective preventive measures. Most accounting firms now also have certified fraud examiners, who typically come in after something suspicious is found and determine whether and how theft is occurring.

Along with sales, purchasing and management employees, in-house accountants and bookkeepers often are culprits, experts say.

Mengel Metzger & Barr LLP recently hired its first full-time forensic accountant, Brian Hedges.

“First and foremost, when you’re dealing with a fellow CPA, it helps to bring in a forensic accounting expert,” he says.

If an audit or investigation reveals a discrepancy, a face-to-face interview with the suspect is a good first step to “see if there is something they might want to get off their chest,” Hedges explains.

Sending key financial and accounting personnel on periodic mandatory vacations gives a CFE time to examine financial records and transactions. Without some sort of audit, the fraud could go on undetected for a long time.

“Having an audit puts employees on notice that we’re having our books examined and there is a likelihood of getting caught,” McPoland says.

The ACFE also found that over 40 percent of business fraud and embezzlement is discovered by fellow employees’ whistleblowing. Taking proactive measures is key to preventing fraud, and that starts at the top.

“Set the tone at the top, and empower employees to alert management of wrongdoing,” Hedges says.

“There is no panacea for all the fraud that goes on in an organization, but to be well-prepared it’s up to each individual employee to abide by a code of conduct and the policy and procedures that are put in place.”

“The biggest thing we look for when we go into an organization is: What tone is being set with regard to fraud?” says Desino’s colleague Luke Werzinger, a certified financial examiner at DeJoy, Knauf.

Forensic accountants advise a preventive approach that begins with a training program for all employees to underscore areas where fraud occurs.

Fraud knows no season, and the ways to defraud are constantly changing. Still, a vigilant business can make it hard for even a CPA within the company to steal from his or her employer.

Experts say certain businesses and organizations—small to midsize firms, churches, doctors’ offices and non-profits that have a small staff in which one person does the bulk of the record keeping—are particularly vulnerable. Segregation of duties in critical financial areas is essential. A scenario in which a single employee has many financial roles, including receiving money, recording it and paying bills, is one that is ripe for fraud.

Review bank statements unopened, and if the business has a signature stamp for financial transactions, get rid of it, McPoland advises. Have a dual-signature requirement for transactions over a certain amount, and examine any transactions close to that amount.

“It’s the ability to take assets and hide it in accounting records that leads to the likelihood of fraud,” Desino says. “We routinely find that one of the biggest risks in small to medium-sized businesses is placing too much reliance on trusted employees without having sufficient oversight or appropriate controls over such employees.”

Business owners or management should check vendor addresses to see that they are legitimate and not the same as a financial employee’s address or a relative’s address, to make sure a fictitious vendor scheme is not receiving company money. Creating fictitious employees is another way to divert funds.

“Collusion is the hardest thing to detect,” Desino says, but it’s not impossible.

Few business fraud cases result in criminal prosecutions. Business owners often are embarrassed that fraud occurred and do not want the public and clients to know about it. A perpetrator who has been caught is typically made to repay the money, but without a criminal prosecution, the thief is free to steal another day.

A CFE can testify in court and help prosecutors quantify how much has been stolen.

Hackers also are looking to steal using malware and email viruses. Desino says that when one of her clients initiated a wire transfer of funds recently, malware took over and the client could literally see the money draining from the account. Internet banking activities should not be done on a computer with email access.

Doing business in another country? That will take an extra level of care, Hedges warns. Foreigners want your money, too. China, Russia, African nations and Venezuela are countries with a high level of corruption, and the financial data of transactions involving those countries merits extra scrutiny.

Todd Etshman is a Rochester-area freelance writer.

5/2/14 (c) 2014 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

What You're Saying 

There are no comments yet. Be the first to add yours!

Post Your Own Comment


Not registered? Sign up now!

To Do   Text Size
Post CommentPost A Comment eMail Size1
View CommentsView All Comments PrintPrint Size2
ReprintsReprints Size3
  • E-mailed
  • Commented
  • Viewed
RBJ   Google