Comstock's magazine 1117 - November 2017 | Page 50

n FINANCE
I
f federal authorities are right, the scheme was simple.
El Dorado Hills resident Jeffrey Davis was national sales
manager for Nature’s Path Foods, a Vancouver-based
organic food company. Glen Martinka co-owned a food
brokerage and distribution service based in Phoenix
that marketed and sold Nature’s Path products.
Davis could authorize Nature’s Path purchases of at
least $3,500. Prosecutors allege that between December
2008 and April 2012, Davis used that power to work with
Martinka to create fake invoices, charging the company
for non-existent services. Davis submitted those for reim-
bursement, and he and Martinka then split the proceeds,
the feds say. Over three and a half years, the pair allegedly
stole about $219,000. (Nature’s Path didn’t respond to a re-
quest for comment.)
Cashiers create fake transactions. An attorney diverts
money from nonprofits whose accounts he managed. A
credit union staffer falsifies bank documents. These are a
few of at least nine cases of proven or alleged embezzle-
ment in the region since 2013. “With fraud, there’s always
something new and different. You never see it all — they
just keep coming,” says forensic accountant Annette Stalk-
er of Stalker Forensics in Granite Bay.
Most local cases involved mid-sized companies,
banks or charities. Each year, small and mid-sized orga-
nizations, including small businesses, lose the most to
employee theft. A study released in August by interna-
tional insurer Hiscox reported that the median employee
theft case cost companies an average of $1.13 mill ion in
2016, and that 55 percent of cases involved companies
with fewer than a hundred employees. And while no one
keeps national data on employee embezzlement, a 2016
survey of fraud examiners estimated that it costs busi-
nesses and other organizations a full 5 percent of revenue
each year.
A sense of autonomy is often what keeps staff happy in
small businesses. But every virtue has its vice and when
it comes to money, independence is cousin to temptation.
Small firms have fewer employees, but they lose the
most in these schemes. The fraud examiners’ survey found
that the median loss at organizations with fewer than 100
employees in 2016 was $150,000, while losses at those with
1,000-10,000 employees were only $100,000.
But most companies don’t get interested in better
controls until they’ve been hit, says Stalker. Small and
mid-sized companies are behind for obvious reasons
— they think they don’t have enough staff to segregate
duties, and they’re more likely to employ family members
and long-term employees, so relax what controls they do
have. That’s why those who investigate swindles say small-
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comstocksmag.com | November 2017
business owners can make inexpensive business-process
changes to avoid being the next target.
YOU THINK YOU KNOW SOMEONE
A common theme runs through many cases of employee
theft: The perpetrator is a longtime, trusted employee, so
oversight has been relaxed. “It’s sort of like, 'Hey, we know
him. He’s been around a long time. It’s OK that he’s not
following the exact rules,'” says John Barrett, director of
EisnerAmper’s forensic, litigation and valuation services
group in Sacramento. Owners who don’t understand the
work of their specialist employees are especially likely to
fall prey.
Barrett worked on a case like that not long ago. A com-
pany hired its first-ever IT director to update the firm’s
software and equipment. The owners saw immediate ben-
efits. Over time, they gave him ever-more responsibility
and independence. Finally, they put him in charge of his
own budget, and he reviewed and approved vendors and
related deliveries.
His supervisors didn’t know that he had family mem-
bers and friends who worked in IT. So, he started ordering
fictitious or wildly price-inf lated parts and services. He’d
send $10,000 to his brother’s company for computers
that never arrived, and the brother would pocket $3,000
and send him $7,000, says Barrett. The owners didn’t un-
derstand enough about tech to know that the spiraling
spending indicated a problem.
The director was caught only when the company
brought in a second tech staffer, who asked a board mem-
ber why the IT equipment budget was so large. When the
company landed some government contracts, the board
member took his questions to the government’s auditors,
who uncovered the slow-moving heist.
WHITEOUT, TAPE AND A KNIFE
Companies targeted often have something else in com-
mon: The owners don’t look at financial statements. That
played a role in one of Stalker’s recent cases involving an
area mortgage broker.
A longtime staffer shared a small office with the com-
pany’s main bookkeeper. They became friends, and the
officemate learned where the bookkeeper kept her login
passwords.
That laid the groundwork for a low-tech, multi-part
scheme. The bookkeeper worked part-time and came into
the office at noon. So the officemate showed up most morn-
ings at 5 or 6 a.m., before anyone else was in. On those days,
she had a priority task: Login to the accounting software
as the bookkeeper and write a check to herself, usually for