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March 6, 2006

Embezzlement blues | The impact of employee theft extends beyond stolen funds

By Kerry Elson
In late December, Provencher Fuels owners Roger and Richard Provencher sued a former bookkeeper for allegedly running off with $700,000 in company funds, a move that capped years of financial struggles for the Biddeford-based small business. Despite a growing customer base, the Provencher brothers had been forced to borrow money in recent years to stay in business, according to a report in the Portland Press Herald. Eventually, the Provenchers laid off the company's bookkeepers, JoHanne and Ricky Elie, and found what they believe is the source of the problem. The couple allegedly had been swindling money from the company to buy luxury items, including two Harley Davidson motorcycles and a Disney Vacation Club timeshare, according to the Press Herald report. (Provencher Fuels declined to discuss the situation with Mainebiz due to the ongoing lawsuit.)

Unfortunately, the Provenchers' story is typical of companies that are victims of embezzlement. And their case is one of a handful in the news in the past several months: Last November, a Somesville convenience store manager allegedly slipped $23,000 from the cash register to gamble at Hollywood Slots in Bangor, and in January police arrested a Belfast Variety clerk for allegedly scamming $30,000 from his employer to buy lottery tickets. In all, there were 26 embezzlement arrests in Maine in 2004, the latest year for which data was available, according to the Maine Department of Public Safety ˆ— and law enforcement officers say even more cases go unreported.

While the crime itself can cost business owners hundreds of thousands of dollars, the steps a business must take to undo the damage ˆ— including audits, legal fees and loans ˆ—add extra costs. Businesses nationwide lose approximately $660 billion to employee fraud annually, according to a 2004 study by the Association for Certified Fraud Examiners. And the study found that small businesses ˆ— ones with fewer than 100 employees ˆ— were the hardest hit, accounting for 46% of reported cases.

"Small businesses are susceptible to this because there's no audit or they don't have a segregation of duties," says Maj. Tim Doyle, director of operations for Maine State Police. When there's only one person in charge of receivables, deposits and balancing the checkbook, Doyle says, it's easy to take advantage of a trusting employer.

Coming up empty
That's what happened to Dave Warren, the owner of a small logging company in Surry who lost $308,000 to his former bookkeeper two years ago. Company checks were bouncing, but the bookkeeper claimed there wasn't enough money in the accounts, forcing Warren to borrow to cover expenses. "We just trusted her, absolutely," Warren says. "Her kids worked for us piling wood, and her husband worked for us. They had the whole thing right."
After Warren discovered some forged checks, he fired the bookkeeper, called his bank to cancel his accounts and then called the Hancock County district attorney directly. Before the state could prosecute, though, Warren had to spend an additional $20,000 on audits to prove the bookkeeper's guilt.

For Warren, the emotional toll was as devastating as the financial loss. "As a businessman, you've just known that you watch your moneyˆ… failure is not pleasant to live with," he says. "It's sickening. It just empties you out."

Warren may recover some of the funds if the former bookkeeper, convicted last December, promises to pay restitution when her case has a status review at the end of this year. While some embezzlement victims receive all their money back in court, other times restitution only trickles in, as the embezzler scrapes together funds. "The reality is that it depends upon what the person [is able] to pay back," says Penobscot County Deputy District Attorney Mike Roberts, who says he's dealt with 25 to 30 embezzlement cases in his 23-year career. "It may be that somebody is only able to pay $50 a month."

Other small-business owners have filed civil suits to recover their money. But according to Roberts, that route is not as effective as a criminal prosecution, which threatens jail time if the embezzler does not return the funds. Beyond the courts, authorities say there's no other recourse to recover the embezzled money. However, victims may qualify for a deduction on federal and state taxes, and also are eligible for a direct loan or loan insurance from the Finance Authority of Maine.

But the court restitution process did help Elmer Alcott, owner of Nappi Distributors, a beer and wine distribution company in Portland. He recovered two thirds of the $115,000 that a former employee stole in 2001 after authorities seized her property. The other third was covered by what Alcott calls employee dishonesty insurance, also known as a fidelity bond, which was part of his company's insurance package.

Such coverage is common among small businesses, according to Chuck Healey, vice president of TD Banknorth Insurance for northern New England. The bonds cover both stolen property and funds by any of a company's employees, and carry yearly premiums that range from $500 to $1,200, depending on the business' size, its internal controls and the amount of coverage. "I think a certain amount is wise because you just don't know when someone will take from you," Healey says.

James Trimble, who owns a realty firm in Bangor, took the route of establishing new internal controls and policies after a bookkeeper embezzled $8,500 from him two years ago. Trimble now receives the business' bank statements at his house, and he's put more than one person in charge of accounts. "I have a CPA [Certified Public Accountant] for my bookkeeping, and another CPA that does the taxes that looks over the CPA that does the bookkeeping," he says.

That approach is the kind of internal oversight that law enforcement authorities recommend to prevent employee fraud. Business owners should collect all receipts, insure employees, hire a CPA, sign all checks themselves, have regular audits and have written procedures for the handling of company cash. And if business owners do find they're the victim of embezzlement, authorities strongly encourage them to report the crime to local police. "I have seen a tendency for companies to just get rid of an employee to not blacken their company's reputation," says Roberts. "But if you don't report it, you're probably just passing the buck onto another employer."

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