Fraud: Costly, painful and all too common
FARGO—When it comes to fraud and embezzlement, no company or organization is guaranteed to be immune. Not even the church.
Bishop Larry Wohlrabe, head of the Northwestern Minnesota Synod of the Evangelical Church in America can say amen to that.
In 2014, Robert Larson, a former bookkeeper for the synod, was sentenced to four years in prison and ordered to pay nearly $787,000 in restitution. Instead of using church money to help needy farmers, the Wolverton man wrote checks to his wife and himself between 2005 and 2012. The cash was used to pay for everything from utility and credit card bills to $345,000 in home remodeling, court records showed.
"It (the fraud case) basically consumed an enormous amount of my time and attention for the first half of 2012. It came to my attention on New Year's Eve 2011 from someone on my staff. Happy New Year!" Wohlrabe said Friday, Aug. 3.
"It was just exhausting, all-consuming, anxious at times for me. It was unsettling for people of our synod," he said. "It was not fun."
Transparency about the case kept churches from leaving the synod. Bookkeeping was outsourced, money-handling policies tightened. Fortunately, the synod also had an insurance policy, "which basically made it right," Wohlrabe said.
"Would I want to go through it again? No. Did anything good come out of it? Yes. We did a top to bottom review," Wohlrabe said. "Maybe we could have done that without an embezzlement, but that sure got our attention."
For Larry Magstadt, the fraud perpetrated at his business, Northland Boring of Steele, N.D., has proven devastating.
In April of this year, a South Central Judicial District judge ordered the company's former secretary Melinda Strom to pay more than $690,000 in restitution. At that time, Magstadt told the Bismarck Tribune that he believed most of the stolen funds had been spent on gambling.
Northland Boring once had 15 employees. Now it is down to Magstadt and one other man, he said Friday, Aug. 3. The loss, combined with the still sluggish Oil Patch economy, has left him reeling and less trusting.
"We're doing everything we can" to save the company, Magstadt said.
So far, there has been no restitution.
"I ain't seen a penny. She's supposedly trying to appeal it," Magstadt said.
He said he had known Strom a long time.
"You can't trust anybody nowadays. It don't matter if you know them all your life. You can't trust 'em," Magstadt said.
Common and costly
Fraud and embezzlement is costly, painful and a common occurrence, says Jeremy Bendewald, a principal and head of forensic accounting at Eide Bailly.
"All organizations and businesses should really consider steps to prevent its occurrence and really identify it," he said. "Don't let things go for too long!"
A 2018 global study by the Association of Certified Fraud Examiners found that the median loss in 2,690 fraud cases examined was $130,000. Twenty-two percent of the cases studied had losses of $1 million or more.
Small businesses, those with fewer than 100 employees, were hit harder than bigger firms, with a median loss of $200,000 per fraud case. Businesses with more than 100 employees had a median loss of $104,000, the ACFE study found.
"In our practice, in the last year or two, our cases ranged from a low of $10,000 to more than $1 million," Bendewald said.
"We see as much activity in our area as anywhere else in the country. We have in the last year seen an uptick in the number of matters we've been involved in," he said. "Most of the time we're brought in, it's reached a larger level."
Certified fraud examiners polled by ACFE estimated that organizations lose 5 percent of their annual revenues to fraud. If the 5 percent estimated loss was applied to the 2017 Gross World Product of $79.6 trillion, it would mean a potential total global fraud loss of nearly $4 trillion.
Something is off
Most cases of fraud and embezzlement involve "some sort of financial burden, either through an addiction of sorts (drugs, alcohol, gambling, lifestyle) or some other personal financial hardship," Bendewald said.
"From the matters that we've been involved in, they've always seemed to believe they can pay the organization back. It's always a few dollars here and there ... to cover their addiction." Bendewald said.
The thefts start out small, "maybe testing the controls. Over time, those amounts grow to larger and larger amounts," Bendewald said.
Because fraud or embezzlement can occur over many months, even years, the people involved, whether employees, managers or top-level executives, tend to underestimate the amounts they've taken, Bendewald said.
There are a few tip-offs that some financial shenanigans might be taking place in a company or organization, but Bendewald stresses being vigilant and paying attention to your intuition.
"If you have a sense or just notice that something is off or that something doesn't make sense to you, you should ask those questions. Be sure you receive reasonable responses. It has to make sense to you," Bendewald said.
Some red flags:
- An employee living beyond their means, or always having financial pressures. If Bob is driving a Ford Focus one day, then pulls in with a Lamborghini the next, you might have a problem.
- The individual or employee won't allow others to perform their tasks or job duties.
- They won't take vacation often, or for just a limited time.
Bendewald said it is important for companies and organizations to limit or reduce their exposure to losses.
- Start with background checks before hiring.
- Know your staff so you can detect potentially bad situations.
- Make it clear that fraud is not appropriate and will be punished.
- Separating duties, such as taking in bills, starting a transaction, authorizing a transaction and paying a transaction, is paramount. "You don't want one person to have too much control," Bendewald said.
- For smaller companies, owner oversight is important. Signing checks, opening the mail, reviewing financial statements.
- Some firms require minimum vacation times, such as two weeks for employees dealing with finances, to make fraud harder to cover up.
- Companies should have a hotline to tip off the employer. Most fraud is unearthed through tips from other employees, vendors or customers.
- Random reviews of financials by business owners or outside accounting firms can help uncover fraud.
- Consider insurance to cover investigation costs or mitigate damages.
- If fraud is suspected, discuss the matter with an attorney, accountant or law enforcement.
Wohlrabe said that the pain at the synod level has gotten congregational leaders to think about their own ministries. And training was made available so that they could protect themselves and their congregations.
"Things I learned from an embezzlement," Wohlrabe muses.
"It would be darned hard for it to happen again. ... You know the old saying: Sunlight is the best disinfectant," he said.
Still, even though the money was eventually replaced, Wohlrabe said the opportunity costs of the time wasted setting things right may never be known.
"What could we have done for the time we spent cleaning this thing up," Wohlrabe said. "That's the thing that nags at me."