Embezzlement: It’s a very different kind of heist – more espionage than smash-and-grab.
With the indictment of a Westmont resident for a suspected five-year, $100,000 retail fraud and the recent exposure of a Dixon, Ill. comptroller’s $53.7 million take across 20 years of municipal service, it’s evident that, even with the best laid plans, scammers will still find ways to plunder.
But there are ways to combat it, according to fraud experts.
Occupational embezzlement could spell doom for upstart or small businesses, especially with a lack of effective fraud detection worked into their tight budgets. Municipal embezzlement can directly impact the solvency of a city or township as much as it indirectly affects the community’s utilities, services and quality of life.
Rita Crundwell had been handling money for the northeastern Illinois community of Dixon since the 1980s. She pleaded guilty to wire fraud earlier this month, in one of the most high-profile – and highly damaging – corruption cases the state has ever seen, according to The Associated Press.
Randall Samborn is the spokesman for the U.S. Attorney’s office overseeing the northern district of Illinois.
“There’s no question that the town of Dixon placed a great deal of trust – almost its entire trust – in Rita Crundwell to handle its financial affairs,” he said. “It was sadly inadequate verification – this fraud was allowed to continue for two decades.”
The keyword here is “trust.” Embezzlers require a good deal of it to work their schemes without drawing attention to their illicit activities.
At small businesses or in small communities – like those in the Greater Johnstown area – putting faith in one manager or official to keep the books (instead of cook them) can be a huge leap, according to Stephanie Stohon, partner with CPA firm Wessel & Co. Her firm specializes in fraud investigation.
“(Often), you have one person paying payroll, making the deposit, paying expenses, signing the checks and reconciling the bank statement,” she said. “With the lack of segregation of duties in companies, it’s more likely that one person is responsible for incompatible accounting duties and has usually been with the company for a number of years, so they’re trusted.”
Life of luxury
From 1991 until her arrest in April 2012, Crundwell forged 159 false invoices to cover up the celebrity’s lifestyle she had been leading on the city’s dime. There were luxury cars, houses, boats, expensive jewelry, vacations and a successful horse-breeding program, which many believed might have been the source of her newfound wealth. Samborn said he thinks that was an indication to probe further.
“The message here is quite simple,” he said. “If you must trust, then verify ... Even seemingly legitimate expenses, at times, need to be questioned.”
Daniel Hockenberry, the former manager of 3D Graphix, a Richland-based subsidiary of Sporting Goods Discounters, was bound for trial in late January. He’s accused of a $100,000 embezzlement that spanned from January 2006 to February 2011. Hockenberry left a trail of discrepancies in the invoice records – that’s what alerted the owner to what Stohon called a “false invoice scheme.”
At Hockenberry’s preliminary hearing, she testified as to the particulars of his transaction skimming:
• Invoices were altered so the differences could be retained as cash.
• Checks for 3D Graphix were made out directly to Hockenberry.
• An email stated that all checks were to be made to Dan Hockenberry.
• Unauthorized purchases were made on a company credit card.
“A lot of times, individuals will set up another bank account with the same bank,” said Stohon. “On a typical audit, they would not be an authorized check signer, but on the ‘secret’ bank account, they’re the only signature person.”
Crundwell’s hidden account was uncovered while she was on an extended vacation – it’s what caused her scheme to start falling apart. Nevermind the years of audits she had skirted to keep her activity secret. Stohon said audits – especially external ones such as those performed by Wessel & Co. – aren’t always the best way to catch a crook.
“Individuals or company owners or the board think that the audit is the way to detect fraud,” she said. “But the audit is in a planned timeframe and (the scammers) typically balance everything or at least adjust everything to conceal the fraud.”
In a recent study by the Association of Certified Fraud Examiners, called the “2012 Report to the Nations,” internal audits accounted for only 14.4 percent of occupational fraud detection in 2012. External audits were even less effective, responsible for only 3.3 percent.
The study showed the most effective method was a tip from a co-worker, responsible for 43.3 percent of exposed company theft.
Co-worker tips key
To encourage internal policing, Stohon recommended not only fraud detection training for employees, but also a hotline for those that want to expose it.
“If you do that, they’ll know you’re serious,” Stohon said. “Just having a hotline is a deterrent because they know co-workers might be looking over their shoulder.”
The most commonly victimized sectors in this year’s study were banking and financial services, government and public administration and manufacturing. The ACFE report showed organizations that employed at least one of the 16 most common anti-fraud control methods experienced “considerably lower losses and time-to-detection” than organizations that did not.
The time it took Dixon officials to detect Crundwell’s theft meant deteriorating roads went unpaved, aging municipal vehicles weren’t replaced and the city had to borrow $3 million to pay its bills, according to The Associated Press.
Tara Gearhart, a certified fraud examiner and senior accountant for Wessel & Co., said Crundwell was “living beyond her means,” the most common of the behavioral “red flags” exhibited by embezzlers, according to the 2012 ACFE report.
“She got used to the lifestyle,” she said. “It usually starts off small. They test it out a little bit – a small check or a small charge to the credit card – sometimes with the thought process of, ‘I’ll pay it back.’ ”
Gearhart said that when they finally nail down the full amount of the loss, the scammers are shocked.
“They don’t realize how much they’ve taken because it gets out of control,” she said.