Monday, March 2, 2015

The embezzler is a family member and business partner.

By Greg Wright, MBA, CFE, CFP, CLU, ChFC

Mr. Floyd recently emailed me “I recently read an article in Food Processing Magazine (Jan 2015) called ‘Look Out for the Fraud Triangle[i]’, and quite frankly, it opened my eyes in explaining exactly what I’ve been dealing with in my company.  Specifically, with my partner, and brother-in-law, of whom I share equal shares in the company.” (sic)

Floyd tried to file charges against his brother-in-law, only to be told by the Prosecutor’s office that it was a civil case.  Floyd’s story is unfolded for you below. 

Several months ago Mr. Dale came into Mr. Floyd’s office, agitated, and, according to Floyd, blurted out.The bank wants us to pay $200,000 by the end of the week or they are calling in (our) loan.”  Since Dale was the Chief Financial Officer and had continually told him “everything was fine,” Floyd was angry.  Whenever Floyd had asked about the finances, the CFO would tell him it’s complicated, you wouldn’t understand.”

Floyd and Dale were equal shareholders in a 50-year-old engineering company with Fortune 500 clients of long-standing.  The organization was known for creative solutions and prompt service.  Their excellent, seasoned staff, ISO certification, and state-of-the-art software were a testament to Floyd’s engineering capability and design team leadership.  Dale, a lawyer, was the administrative head.

They had known one another since Floyd married Dale’s sisters over thirty years ago.  They became business partners when Floyd needed cash to purchase the firm from the original owner who retired.  Floyd’s mother-in-law provided most of the cash.  Dale had the credentials to be CFO and wanted to leave his law firm.  He no longer enjoyed the practice of law.  The deal was made in heaven. 


When I met Floyd, he characterized himself as being a creative engineer and team cheer leader.  He told me that the firm’s success was due to the technical excellence of his staff.  His job was to work with clients, define the objectives of each job, be a cheer-leader, and make sure the job got done right and on time.  Dale was the administrator, bean counter and had little or no interest in the technical side of the business.  Both received the same salary, benefits, and corporate dividend. 

Floyd hated accounting.  But, after being notified by Dale that the bank wanted to call their loans, he reached a tipping point. Recent yellow flags of caution became red flags that he had failed to act appropriately.  He had received a few personal calls from long-term suppliers about delinquent bills.  He could not understand how their company could have survived the 2008 economic downturn, currently be so successful, and at the same time apparently “be so money starved.”

He reached out to the firm’s CPA, who told him that he had been waiting for him to call.  The CPA had harbored strong suspicions about Dale’s managing of the firm’s finances, but he was under strict orders from Dale to “just do the taxes, nothing else.”  He suspected that something was going on and that Dale didn’t keep good records.  Floyd and his wife spend time with the accountant learning about the firm’s QuickBooks software.  They found several anomalies between the bank statements and the books:
  • Checks written to Dale for large amounts without supporting documents
  • A checking account ATM authority with Dale as the only authorized person
  • Multiple ATM withdrawals
  • Check numbers not recorded in QuickBooks. 
  • Fictitious open aged accounts receivable
  • Over $200,000 was unaccounted

Where did the money go?

Apparently Dale knew that it was only a matter of time until all of the facts came out into the open.  He arranged and met with Floyd off-site where he confessed that he gave himself a $50,000 raise last year without telling him.  After confronted Dale with the accounting anomalies he and his wife had found, Floyd asked him why he needed the money.
Was it drugs or alcohol?  Dale said “No.”  Floyd next asked, “Do you have a mistress on the side?”  “No,” responded Dale and he then abruptly left.  Later that day Floyd’s wife said that Dale had visited her following their earlier meeting and confessed that he had stolen money from the firm. 

Where did the money go?

After Dale was banished from the building, and the locks were changed, his computer was searched, and an intact file was uncovered that had not successfully been erased.  The file laments the emotional abuse Dale allegedly received from his father, and Dale’s addiction.  Floyd sent me the file which, in part, reads as follows:

“Fifth Step.
Admitted to God, to ourselves, and to another human being the exact nature of our wrongs.”
“When I had to make tough decisions I would run from them and into my sex addiction.  After I acted out, the pressure to make a decision would grow, and with it my anxiety.  I would escape back into my addiction.  And this downward spiral continued for 40 years.”

"The last 4 or 5 years I started to slip into a feeling of hopelessness and depression, that things would never improve.  That my addiction would get worse until it consumed me.  Part of me wanted to get caught so that maybe I could find help, but I couldn’t imagine what that help could be.”  (more later)

The above quotes were taken from that file; but, Floyd and Dale are not their real names.  Dale has recanted his confession to Floyd and his sister (Floyd’s wife).  

Today Floyd and Dale are locked in legal combat. 

The Fraud Triangle article mentioned in the opening paragraph helped Floyd understand the embezzlement that has befallen his firm.  Famed Criminologist Dr. Donald Cressey is credited with the Fraud Triangle in his book “Other People’s Money.[ii]  Cressey maintained “for embezzlement to occur, there must be: (1) a non-sharable problem, (2) an opportunity for trust violation and (3) a set of rationalizations that define the behavior as appropriate in a given situation. He wrote that none of these elements alone would be sufficient to result in embezzlement; instead, all three elements must be present.”

Interestingly, if you were to read Dr. Cressey’s books and papers, Dr. Cressey did not use the term “fraud triangle.”   Others later ascribed that term to him. 

Based on a computer file on Dale’s computer and attributed to him (confirmed by metadata), it appears that Dale’s “non-sharable problem” was a satyriasis addiction.   His position as Chief Financial Officer acting without supervision provided the opportunity.  His rationalization was that Floyd’s son (Dale’s nephew), several years ago, had worked as a temporary employee. Dale was aware and had approved the hiring. 

Dale’s Fifth Step diary continued as follows, “And I was consumed with Fear.  Fear of getting caught and the humiliation that would cause me. Fear of losing my wife.  Fear of losing the respect of my children.  And fear of getting help and what that help might be.  Would I have to go away to get inpatient and how would I explain that to my wife, my kids, my friends and my coworkers?  And fear of having to tell anyone what I had been doing.”
Some experts believe that family member fraud is greater due to an environment of trust. For most business owners, it is difficult to understand or recognize that a family member seen almost every day could be stealing from you. 

Protect your business:
  • Have the bank statement mailed to your home.  Open it.
  • You are not too small to have a fraud hot-line. Encourage your employees, customers and suppliers to report suspicious behavior. Protect whistle-blowers.
  • Personally sit down alone with your outside accountant, company lawyer, and insurance agent every year. 
  • Background check key people.   Include relatives in key positions.
  • Ask a Certified Fraud Examiner to do a fraud assessment every four years. 

[i]D. M. Studler, “Swap the Food Pyramid for the Fraud Triangle,” Food Processing, January 5, 2015, page 1.
[ii] Donald Cressey, Other People's Money: A Study in the Social Psychology of Embezzlement. Montclair, N.J.: Patterson Smith, 1973

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