Workplace Thieves Hit Small Businesses the Hardest

When a bar manager noticed more than $800 missing from a locked safe last month at the Rosemount American Legion, suspicion turned toward the post's popular young commander, a Persian Gulf War veteran. In November, Jeffrey Matthew Kaczmarek, 36, was arrested and charged with felony theft.

Post members soon discovered the financial damage was far worse than a few hundred dollars.

Rosemount police learned Kaczmarek had not paid the post's property taxes for two years, leaving it $24,000 in arrears. Its checking account was also low. Several checks had been written out to him and deposited into his personal bank account.

"A commander in a post is kind of like the CEO of the community," said Chris Jones, the post's bar manager. "He betrayed our trust. … I've got a lot of hurt and disappointed people down here who still can't believe it happened."

Disbelief is a common reaction when a trusted employee, manager or owner embezzles from a small business. But experts say the trust level in smaller businesses and organizations makes them ripe targets for internal thievery. And the impact there — both financial and emotional — is often disproportionately greater.

While multimillion-dollar corporate embezzlements make headlines, it's churches, schools, clubs and mom-and-pop shops that have the hardest time recovering their financial footing.

"For the typical small business, it's not common. But it's traumatic when it happens. And it can happen," said Neal T. Buethe, a Minneapolis employment lawyer with Briggs & Morgan.

Some recent findings from a study by the Association of Certified Fraud Examiners, a national group that looked at 508 occupational fraud cases from across the country:

• Companies with fewer than 100 employees suffered the greatest losses, second only to businesses with more than 10,000 employees. Small companies accounted for 46 percent of all cases, with a median loss of $98,000.

• More than a third of frauds were committed by managers, while 12 percent were done by owners or executives.

• Most occupational fraud perpetrators are first-time offenders. Criminal background checks won't weed out all the crooks "because most frauds are committed by apparently honest employees."

• Most frauds came to light through tips from other employees or internal audits. But more were caught by accident — say, an employee noticing surprising bank statements while filling in for a co-worker — than through day-to-day, internal controls. And that's especially true for smaller businesses.

• The most common frauds included skimming revenue before it's recorded, stealing inventory, billing schemes, doctored invoices and payroll tampering.

THE FRAUD TRIANGLE

When investigating embezzlement, forensic accountants often consider what they call a "fraud triangle" — motive, opportunity and rationalization.

As for typical motives, "it could be greed, it could be that the person wants a big lifestyle that their income would not support. It could be some sort of an addiction to drugs or gambling," said Diane Matson, an assistant professor at the University of St. Thomas, whose research specializes in forensic accounting. "It could be that the person feels resentful against the company, perhaps because they were passed over for a promotion."

Then there's opportunity. One reason that small businesses may be especially vulnerable is because there are fewer workers, increasing the likelihood that the same person who handles the money can also doctor the ledger.

"In a small business, it is pretty common that you're touching cash and also entering numbers into accounting," Matson said.

"Then the rationalization is: How do you live with yourself? They kind of rationalize it that it's just a loan that the employee will pay back," Matson said. "Or, I'm not getting paid enough for my abilities, so I'll make it up this way."

Last month, a former clerk at the Dakota County jail in Hastings was arrested for allegedly stealing $120,000 from a recently created cash account that held inmate funds for them until their release. The "canteen" funds, which the clerk had primary responsibility for withdrawing from a jail safe and depositing into a Wells Fargo bank account, also included commissions from vending machines, booking fees and other fee services.

Investigators said the clerk, Theresa Marie Ford, 42, admitted to a gambling problem and told them she was going to a casino several nights a week, losing $1,000 at a time, but always with the hope of returning the stolen funds. The Dakota County sheriff's office has since adjusted procedures so more than one person verifies the deposits.

Ford's case illustrates more than just the perils of poor accounting controls. Authorities say many embezzlements are prompted by a drug or gambling addiction, where the employee begins skimming small sums of money, hoping to pay it back. The thievery snowballs, and the embezzler quickly loses track of the amount being taken.

When asked how much money she thought she had stolen, Ford estimated $50,000 — less than half of what was actually missing.

"In a majority of these cases, you find the money is either going up their nose or down a slot machine," said Dakota County Sheriff's Deputy David Bellows. "And down a slot machine is becoming much more common."

HOW MUCH IS GONE?

Last month, Apple Valley police met with corporate security representatives at a Bed, Bath & Beyond store, where employee Bently Vance Ralston had admitted to depositing thousands of dollars in fraudulent refunds into his checking account. Ralston, 28, of Bloomington was charged with two felony counts of theft.

According to court documents, Ralston told police that he used the money for household items, trips and gifts. But when told how much money he had stolen, Ralston, like Ford, was in for a shock.

He estimated he had taken approximately $6,000 to $8,000 — far less than the $22,000 that investigators said they had traced back to his thievery.

Last December, the financial officer at Lakeville's Christian Heritage Academy left a letter for school officials admitting she had been spending all the savings on herself and covering up an estimated $150,000 in losses by falsifying balance sheets, leaving doubt whether the school would make its next payroll.

"I never was able to get my spending under control, and I continued in a downward spiral," wrote Martha Gay Narron, 45. "I don't even know the exact amount that I have taken, but all our reserves are gone."

The school was able to get back on its feet through donations, and Narron, who admitted to being a chronic spender, sold her Burnsville home to make restitution.

The cases are scattered across the Twin Cities.

A former Arden Hills employee, Sandra Rae Berres, 41, was charged last week in Ramsey County District Court with stealing $224,000 from the city by doctoring more than 100 checks intended to pay for fuel. Investigators believe Berres has been in treatment for a gambling problem.

In June, the incoming board chairman of the St. Paul Winter Carnival's organizing foundation was indicted by a federal grand jury for allegedly embezzling pension funds from his own contracting business in Columbus Township in Anoka County. Michael Jay, 54, resigned his position with the board but has disputed the charges.

Ana Hellzen, 40, of West St. Paul was charged Dec. 6 with stealing about $14,000 from a graduation party fund for students at Henry Sibley High School. Hellzen, who allegedly used the money to pay medical bills and other debts, told investigators that "she was waiting for this day to come, that she had fallen on financial hard times and … she knew she did not have a right to the funds," according to a criminal complaint.

The other party co-chair told police that Hellzen received all the invoices and bank statements because she was the primary person listed on the account. No one noticed the money missing until the bank reported last summer that the account was overdrawn by more than $11,000.

Asked how much she thought she had taken, Hellzen estimated at least $6,000, though she was unsure of an exact figure, according to a criminal complaint.

Organizers of the party, billed as an end-of-year lock-in, said they are already on their way toward making up the missing funds through donations from parents and businesses.

"We will work our tails off to raise as much money as we can," said Mary Anne Bailey, co-chair for the 2006 Sibley Senior Party. "The community is responding so favorably because this is such an unusual situation. …We've already raised well over $4,000, and we haven't even sent out a formal appeal."

Experts said most embezzlements are eventually uncovered, but studies show that more than a third of cases are never reported to law enforcement officials. The employee resigns or is fired with no legal repercussions.

Even after insurance, judgments, restitution and settlement agreements, companies tended to recoup only a slim percentage of their losses.

"In over a third of cases, they got no recovery," said John Warren, general counsel for the Association of Certified Fraud Examiners. "The general rule is prevention is much cheaper."

"I think, in a lot of cases, companies would rather absorb the loss and then move on, rather than letting the public know that money was lost," Bellows said. "They see it as a loss of confidence. … And, frankly, I don't think that's the right way to do it. It means these people are right back out there committing the crime."


Knight Ridder content Copyright 2005 provided via The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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