Ferreting Out Fraud

For even the wisest and most courageous businesses, the yellow brick road to success can be fraught with dangers from both within and without-and some are much less obvious than lions and tigers and bears.

Business owners can install alarm systems, cameras or guard services to protect against break-ins or shoplifters. But what about the potentially more dangerous, untrustworthy employees, business partners or companies you do business with?

Embezzlement, fraud, drug use or other criminal behavior take place at every level and in just about any kind of business. All can undermine a company-and it doesn't take an organized effort.

"One employee can ruin a business," says Dave Watts, co-owner with Gary Sherman of Allied Business Solutions. The two veteran investigators recently opened their business in Fort Myers to address businesses' protection needs.

Southwest Florida might not have corporations as large as those that have grabbed headlines in recent years with their criminal activities. But the region has its own share of challenges exacerbated by a transient population and a labor shortage, which can lead desperate employers to hire untrustworthy workers.

That's why security experts, such as Watts and Sherman, recommend that companies take precautions.

Breaches of Trust

Arthur Rubin of Naples is an independent certified fraud examiner and accountant who specializes in tax issues and is qualified to represent clients before the Internal Revenue Service. He is called upon to look into a number of civil cases, mainly for private companies.

Most involve embezzlement, he says. "It's usually internal. It can be with partners or fellow shareholders paying certain bills or taking money out of the company for somebody's benefit other than the company's."

The crime can take years to appear, he adds. "It's usually something that's gone on five or six years before someone notices something's not right."

In a case involving a surgical practice, for example, the bookkeeper-the wife of one of the doctors-was paying personal bills from the practice's money, to the tune of more than a million dollars. "It went on for six years," says Rubin.

In another case, a doctor wasn't receiving much in royalties from a major pharmaceutical company that had bought licensing for a procedure he developed. It turned out sales were booming, but a manager at the company was underreporting them, because the less he paid out, the better his company would reward him.

Overstating sales-creating phony sales to attract investors-is another crime Rubin has dealt with.

Fraud can occur at any level or industry, he says, and certain situations can make the deception a little easier. "If someone's going to buy from vendors and there are a lot of purchases, it's more difficult to follow transactions and uncover things," he says. "Many times, checks are made out to phony vendors."

To prevent fraud, Rubin suggests a separation of duties. "So if a bookkeeper is recording what comes in, someone else is making the actual deposits at the bank," he explains. Someone should periodically check bank statements, shipping statements, invoices and other documents to make sure they're in line with previous years. "With some computer programs, it's easy to defraud a company," he adds.

"Education and awareness are extremely important, and I think fairness and an equitable relationship are important," Rubin says. "I don't think I've ever done a fraud examination where the perpetrator hasn't said in some way that he or she deserved more money and that's why they did it. It's usually some form of financial constraint that causes people to cross the line."

Protect Your Business

Crime comes in many forms. businesses fall victim to credit-card fraud and identity theft, which are rampant in bars and restaurants, where employees handle many credit transactions. Workers' compensation fraud is another problem nationally, and the local building industry has its share, Sherman says. Businesses also need to take steps to protect their proprietary information, including company secrets such as client lists and business plans, Watts adds.

Problems are not necessarily what they first appear to be, Sherman says, and they may have deep roots. A theft problem, for example, might be a result of employee drug use.

The trick is catching criminals before they get into the business, because once they're in, it's tough to get them out-and they can do a lot of damage-including expensive lawsuits-before you succeed.

Potential negative publicity makes businesses sometimes reluctant to call in law enforcement, which is why they hire private investigators, say Watts and Sherman. They meet with clients to evaluate the problem and the best approach to dealing with it, whether that means ferreting it out with undercover tactics or interviewing everyone to spotlight the issue.

"We can't make an arrest, but we can determine if they do have a problem, identify the source and get rid of the problem," says Watts.

But all agree that the best approach is to prevent problems by getting professional background checks-especially in Southwest Florida, where almost everyone comes from elsewhere-on "anybody you deal with in business who has the potential to do damage to your business," says Watts. That includes employees who would handle money or represent the company publicly, as well as subcontractors and other companies you're considering doing business with.

Background checks might include past criminal, employment and credit records-which job applicants must authorize. Not everyone has the same needs; it might be a driving record for a bus-driving position, a credit history for an accountant or finding out whether a day-care applicant is a sexual predator. "That's not thousands of dollars," says Watts. Depending on the particular situation, the cost could be less than $100.

In addition to a background check, a personality test can help. "If you're hiring or promoting someone to a level of great responsibility, at least the final few candidates need the Minnesota Multiphasic Personality Inventory, especially for positions with power and responsibility," says Duane Dobbert, a behavioral analyst with 34 years in criminal justice who teaches forensic psychology at Florida Gulf Coast University. "You may end up wasting a week or two in the decision process and spending $1,000 or $2,000, but it may save you millions."