The Deceptive Office Manager: Employee theft and embezzlement

When this CFE was being ignored by his heating and cooling company he suspected more than poor customer service. Sure enough, the office manager was pilfering the firm. Here's the CFE's story of how he helped devise a plan to prevent subsequent employee fraud.

When we bought our new house, we paid for warranty service on our air conditioner through BACME Heating and Cooling, which was owned and operated by Cliff.1 After 18 months, we had a small problem with the unit and one of Cliff's technicians said he would order a part. Weeks went by so I called BACME and talked to Christine, the kind and helpful office manager. She said they would research the problem and call me back within a couple of days. But there was no response for weeks. The owner eventually fixed the problem and gave me an additional year of warranty without charge.

Several months after my initial calls to the company, we repeatedly called about another problem. Christine always had some reason why Cliff wasn't available. One time he was out of the office, another time he was at lunch, another time he was in conference and couldn't be disturbed. Christine was always willing to help but she couldn't solve our problem.

I told my wife that I was finally fed up. After I filed a complaint with the Better Business Bureau, my fraud examination adventure began.

The BBB contacted Cliff; he responded that he had no record of doing any warranty work at our house. I was sure he was putting me off again, so I quickly mailed them the date the technician had been to our house and copies of the invoices for service and parts they had left with us. I finally got their attention. One of Cliff's technicians called me and made an appointment to come to my house. I told the technician that I was a Certified Fraud Examiner and that the things I was seeing at BACME raised my suspicions.

After the technician left that next afternoon, I mentioned to my wife that Cliff must have some real problems and I thought it was time I talked to him. It appeared that he not only didn't know anything about the internal workings of his own business but someone else was actually controlling his customers.

Before I could phone him, Cliff called me early the next day and said, "I need help." We arranged to meet at his office later that morning. Here's where things really got interesting. The FBI had just arrested Christine, the office manager, after Cliff's bank reported the discovery to the FBI that all of the business' cash deposits had completely stopped for eight months.

Christine used her exuberant charm and "can do" attitude to cover up the embezzlement and misappropriation of almost $330,000 during those eight months! Cliff's business was falling apart and he needed help now.

In 2004, Cliff met Christine when she owned a company that produced security badges for a secure government facility in which his employees worked. She also had a contract with the state of Arkansas producing these badges. He had also seen her several times working at a local dry cleaner near his business. One day she casually mentioned that business was a little slow and she might need to find other work. Cliff told me he thought she was a nice lady and pleasant in nature and characterized her as the average "soccer mom." He hired her in November 2004 as a part-time bookkeeper but he rapidly increased her responsibilities. She quickly became an indispensable and integral part of the business. Christine was always available and willing to handle the most difficult jobs and had the right answers to Cliff and his customers' questions. She would make sure that customer complaints were funneled to her, ostensibly because "Cliff was overworked" and she "wanted to make a contribution to the business."

Discoveries after the fact
Much of Cliff's business is performing warranty service. This entails collecting a deductible fee from the customer, which is generally $50 to $100 per service call depending on the contract. Customers normally pay in cash but occasionally by check. BACME invoices the balance of the service, generally about $350, to the warranty company. Cliff discovered that none of the cash deductibles for the warranties ever made it to the bank. He also had some cash customers - whose air conditioning systems were no longer under warranty - who had paid $500 to $3,900. Most of this cash wasn't deposited to the bank either.

Coincidentally, the local bank security personnel had been watching the business profile and had noticed that cash deposits during an eight-month period had dropped to almost zero! They estimated a total reduction in deposits of $80,000 to $100,000 during this period when Christine had been responsible for deposits. (Cliff later told me that he sat in utter amazement and disbelief when the bank security personnel and investigators showed him on their computers the decline in cash deposits; he described it as the most gut-wrenching experience of his life.)

Cliff, the bank, and I theorized that Christine had been pocketing the cash that had been coming in from the warranty customers because there were no cash deposits and the money had to be going somewhere. She covered her thefts by destroying the invoices that Cliff should have been using to bill the warranty center. Not only was he losing immediate cash but the income due from the warranties made the overall loss significantly higher.

But Christine didn't stop there. Because she had eventually become so indispensable to the daily operation of the business, she had convinced Cliff that the six cell phones she bought for the business were necessary. She used these phone agreements as background verification information when she opened other bank accounts.

Also, Cliff bought all his office supplies at a local office supply store that offered his business up to a $50 rebate each month. Christine used different phone numbers and aliases to open six separate accounts at the supply store and pocketed the $300 in rebates that should have come back to the business.

She charged personal purchases on Cliff's credit cards. And she "sold" home warranties to customers and made $25 for each one she "sold." Also, Cliff paid her a commission for nine to 10 new sales per week, none of which could ever be verified as being real transactions.

Aside from the obvious monetary losses, Cliff was concerned about the growing loss of customer confidence. Many of his clientele are commercial businesses with large corporate accounts. How could he explain to customers that he didn't have any records of work done for them? How could he expect them to rely on him? Cliff was also concerned about his estimated 2,000 credit card customers. How would they be protected if Christine were to have stolen their account information?
After he tallied his losses, he realized that Christine had not only stolen his money but also his business. (At press time, Christine's criminal case is still pending.)

Christine's other victims
I met with the owner of the dry cleaning shop where Cliff had met Christine. It seems that Cliff wasn't the only victim. The owner of Dave's Dry Cleaning said he had lost about $20,000 to Christine in a couple of years. She created false dry cleaner accounts, opened credit in her name and in the names of the business' customers, and charged items to those accounts. Dave didn't discover any of this fraudulent activity until after Christine had left the business, but the owner didn't want to prosecute her out of the fear that his customers would find out that they were potentially at risk. Dave told me that he didn't think anything would happen to Christine if he pushed for prosecution.

After realizing that he was a victim of employee embezzlement, Cliff significantly tightened up the controls over his invoices and his money. I assisted him in devising a program that should help minimize the risk that employees will use his business for personal gain.

No single person now handles accounts payable and accounts receivable. Cliff makes bank deposits himself every day. When he can't, his accounting manager personally copies all incoming checks and cash, which are annotated with the related invoice numbers. He's installed a new industry software program, which produces invoices and has internal audit controls to ensure that no invoices are voided or cancelled. The software is not only backed up routinely but the backups are installed on machines kept off-site.

A complete audit trail has been established beginning at the point when a customer calls and then progresses to dispatch of the technicians, parts ordering, receipt of payment and posting of payments, and to the accounts and specific services performed.

Cliff also made several other changes in his daily business. He gives his personal cell phone number to every customer. Never again, he says, will he be isolated from the daily activities of his business. He has completely cleaned out his current stock of parts and inventoried every part he owns. He's installed new alarm systems in the warehouse and office areas including new surveillance cameras. Service trucks should soon have GPS systems installed. I recommended a local CPA with a forensic background who Cliff hired to conduct at least two full unannounced audits each year.

He's hired me to conduct background investigations on prospective employees, which includes full interviews, complete background histories, and personal verifications of previous positions and references. Cliff also agrees with my recommendation that I'll conduct most verifications in person and not rely on computer checks, which, as we know, aren't always 100 percent accurate. "Never again will I allow anyone to work for me that hasn't gone through a full and thorough background investigation," Cliff said.

I'm sure there are many other things Cliff has done to protect his business and he's on the right track. It will take some time to recover, but he's got the right perspective and I'm looking forward to seeing how things progress.

Sage words: avoid the bullet
I talked to Cliff before writing this article and asked him for any sage words of advice. He said he was one of those business owners who had heard about employee theft and embezzlement but never believed it could happen to him. "One thing," he says, "that I want every business person to learn from my experience is this: anyone that will have anything to do with the business finances or operations should be thoroughly checked out before they come to work for you. To do anything else is to play Russian roulette. They will get you sooner or later. I'm simply removing the temptation."

1. Names have been changed.
    

Michael J. West, CFE, is the owner of Arkansas Investigations, a private investigative agency based in Little Rock, Ark., specializing in fraud, background, and public integrity investigations.

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