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A $1,500 overdraft on a payroll account was the first inkling Ruth Constant, EdD, MSN had that something was very wrong. Constant is the president and chief executive officer of Victoria, TX-based Ruth Constant and Associates, which operates home health agencies in Beaumont, Port Arthur, and Wichita Falls, TX. The even amount and size of the check initially made her think it had been posted to the wrong account.
From her office in Victoria, Constant called her accountant who worked out of the agency’s Beaumont office. "Something’s wrong here," she said, relaying her suspicions about an erroneous account entry. The accountant assured Constant that she had already called the bank and corrected the mistake. But something nagged at Constant, and she continued asking the accountant about the transaction:
Constant: "Whose check was it?"
Accountant: "It’s [the accounting supervisor’s]."
Constant: "But you have to take out taxes."
Accountant: "Ruth, don’t you remember? We had an agreement not to take out income tax for her."
Constant: "Well that may be, but you still have to take out FICA."
By now, sirens were blaring inside Constant. She knew the accountant’s pat answers were hiding something, but she had no idea that the truth would send her on a two-year odyssey from 1989 to 1991 to save her business and salvage her reputation.
Over the next few days, Constant discovered that the accountant, one of her most trusted and long-standing employees, had embezzled nearly $300,000 over a three-year period. To make matters worse, while still reeling from the shock of both the financial loss and shattered trust, Constant was hit with an even more devastating deceit. The accountant falsely accused her of Medicare fraud, launching a 20-month FBI investigation that ultimately exonerated Constant, but nearly shut down her business in the meantime.
If Constant’s ordeal sounds too far-fetched to have any relevancy for your operations, think again. Embezzlement is a silent white collar crime eating its way through U.S. businesses, according to experts. In what it believes is the most comprehensive study of embezzlement, the Association of Certified Fraud Examiners (ACFE), an organization committed to contributing to the detection and prevention of white collar crime based in Austin, TX, found that the average organization loses $9 per day per employee, or about 6% of its revenue, to fraud.1
The study found that while embezzlement cuts across all industries and organizations, it disproportionately affects small companies. The average reported embezzlement is $65,000, but small businesses average a $120,000 loss per fraud incident.
Still think it can’t happen to you? Home care providers are a trusting lot with a humanitarian mission. But your disbelief is no different than most others, says John Warren, JD, associate general counsel at ACFE. "The hardest thing is convincing companies that they’re vulnerable. No one wants to believe that someone is stealing from them. But the numbers are irrefutable," he says.
Constant was no exception. "I had 100% trust in her," she says, referring to her former employee.
Even if you can’t believe that any of your current employees would steal from you, you can take steps to minimize the possibility of white-collar crime, Warren advises. Learn to recognize behaviors that often signal improprieties.
Before their crimes are detected, embezzlers often seem like model employees. They may work long hours, including nights and weekends, take few vacations, and refuse help. "They’re usually seen as hard workers and loyal. It’s very common because it takes a lot of work to conceal what they’re doing," Warren says.
As dedication may be a hallmark of most of your employees, you should consider it in the context of other workplace behaviors. Embezzlers responsible for financial transactions may leave a trail of accounting anomalies. "You may see strange journal entries such as a high number of courtesy or discount entries, or invoices to companies you wouldn’t [expect to] be paying," Warren explains.
Missing or incomplete support for transactions may also be a signal. For example, payments without accompanying invoices or photocopies rather than original invoices. Accounting inaccuracies may also signal problems. Embezzlers may intentionally miscalculate and leave out-of-balance ledgers to hide their activity, he adds.
Some embezzlers use analytical anomalies to work their scams, Warren notes. Payments to unorthodox vendors in the context of your business may be a shell the embezzler uses to funnel money to herself. For example, it is improbable that a private duty company would process invoices to a gravel company, he explains.
Or, the embezzler may cut additional checks to a commonly paid vendor. For example, if you pay a supplier on the 15th of every month, he or she may begin processing additional checks at the first of the month.
In either situation, the slight of hand may go undetected if someone in authority doesn’t review checks and question the logic of your organization’s relationship with new vendors or suddenly larger payments to existing vendors, Warren continues.
In Ruth Constant and Associates’ case, the embezzler used at least three schemes. She cut extra payroll checks to herself and oversaw the payroll reconciliation to hide those efforts. When the company stopped manually processing payroll and began using an outside vendor, she retained the old manual checks and used them to process payments to herself. Finally, when the company took on its own computer-processed payroll, she paid herself with the unused checks she recalled from the vendor, Constant says.
Sudden changes in employee lifestyle or behavior may also signal trouble, Warren advises. "If an employee suddenly drives a better car, dresses nicer, or [begins throwing] extravagant parties, you should wonder Why has his lifestyle so improved?’" he says. Likewise, someone who suddenly exhibits signs of stress such as being irritable or moody, smoking or drinking more than usual, or acting suspicious of others looking at his work, should also raise concerns.
In addition to recognizing employee work habit, behavior, and lifestyle changes, you can take these actions to help prevent employee fraud:
o Create a strong system of internal controls.
"Segregate duties. Don’t put one person in control," Warren says. For example, make three different employees responsible for receiving, depositing, and posting cash payments, respectively. "Someone different than the person processing transactions should [also] review transactions. [The person] should be independent enough and have authority to act [on any variances]," he advises. Ideally, the doer and reviewer should work in different departments.
This may be a challenge in small companies, simply because there aren’t enough employees to totally separate functions. In those situations, "some companies may hire accounting students to run exception reports of unusually high payments or vendors. It cuts down on the owner’s time and energy [reviewing transactions], but it’s best to go over things yourself," Warren recommends.
In the pre-fraud days, Constant was so busy running her business, she never personally reviewed the company’s canceled checks and bank statements. Now, she periodically scans checks as they are prepared. "There’s no definite pattern. It’s spot-checking. No one knows when I’m going to do it," she explains.
Larry Leahy, MHA, CHE, CHCE, director of program integrity for Ruth Constant and Associates, also reports that the company now performs extensive background checks on anyone in a financial decision making or accounting position. For about $130, an outside firm conducts work history, credit, driver’s, and educational transcript checks on such individuals.
Constant also created Leahy’s position after the fraud. Though his role was not specifically designed to combat embezzlement — he is responsible for the company’s overall regulatory compliance, risk management, and retirement plans — he reviews financial statements, conducts safety assessments, and performs some internal audit functions. Leahy also developed the company’s compliance plan, which includes anti-fraud due diligence actions by key officers.
o Increase the perception of possible detection.
"Educate employees about fraud. It doesn’t have to be negative; [you can explain] that it can shut down the business, and you’ll have more eyes and ears aware [of the consequences and willingness to report suspected problems]," Warren says. Also, make employees aware you are reviewing their work, managers will be trained to recognize behavior changes, and you will pursue wrongdoers. If your ethics policy does not specifically address fraud, consider revising it or adopting a separate fraud policy, Warren advises. (For a sample fraud policy, see pp. 155-156.)
Enforcing vacation policies and periodically shifting employees’ duties also puts potential wrongdoers on notice that any fraud will likely be detected, Warren explains.
Keep the door open
Once you make employees aware, keep fraud prevention on the front burner by including information about it in employee newsletters and payroll inserts. Also consider activating a fraud hotline, enabling employees to anonymously report suspected violators, Warren suggests.
o Develop a supportive work environment.
Personal financial reversals can cause employees to commit workplace fraud. To both ease their anxiety and reduce their potential for fraud, "Keep an open-door policy where they can come talk to you," Warren recommends. Even if you can do nothing for an employee who tearfully reports "My husband lost his job, and we can’t meet our mortgage," just listening "relieves their sense of desperation and makes them more loyal to the company. It is more difficult to steal from someone when you feel they care and listen to you," Warren says.
o Run an ethical ship.
Create a top-down ethical environment, he advises. If employees perceive that management skirts the law, it makes it easier for them to misbehave, he says. This particular precept provided little help for Constant. A stickler for ethical behavior, she requires all employees to memorize two statements. "One is the mission statement: to provide the very best home health care possible.’ The other is to know the answer to the question what is the quickest way to get fired from this agency?’ The answer is to falsify a record,’" she says.
If you suspect any wrongdoing, or simply want an assessment of your organization’s vulnerability, consider contacting a fraud prevention professional, Warren advises. The ACFE certifies and maintains a large database of fraud examiners who are trained to bridge the gap between accounting and law enforcement.
Hiring a fraud consultant may seem like an extravagance given the home care industry’s current difficulties. "Small companies especially are hesitant of the cost to call someone in, but look at the cost [of not doing so]," he notes.
Though Constant survived her almost two-year ordeal and argues that her company is stronger than before, "It was a bitter lesson for me to learn," she acknowledges. "Just because you think you’re honest and operate an honest organization is not enough. Get a good lawyer to defend that position."
1. Association of Certified Fraud Examiners. The Report to the Nation on Occupational Fraud and Abuse. Austin, TX; 1996.
• Ruth Constant, EdD, MSN, President and Chief Executive Officer; Larry Leahy, MHA, CHE, CHCE, Director of Program Integrity; Ruth Constant and Associates, 1501 Mockingbird, Suite 404, Victoria, TX 77904. Telephone: (512) 578-0762.
• John Warren, JD, Associate General Counsel, Association of Certified Fraud Examiners, 716 West Avenue, Austin, TX 78701. Telephone: (800) 245-3321. Web site: www.cfenet.com.