Small businesses are fraud's biggest victims

Enron makes headlines, but modest firms are more likely crime targets

April 13, 2003|By Andrea K. Walker | Andrea K. Walker,SUN STAFF

Accountants at the George J. Falter Co. were surprised when a large bill went unpaid by one of their best customers. Surprise quickly turned to suspicion.

"The bill kept getting larger and larger and we wanted some closure on it," recalled Frank Falter III, the company's treasurer and great-great-grandson of the candy distributor's founder. "So we checked it out."

What they discovered stunned them: The convenience store owner had indeed paid his bills. But one of Falter Co.'s own employees had ripped off $60,000.

"We were astonished," Falter said. "When you give somebody a job, you don't expect them to steal from you."

What happened at the Baltimore candy distributor isn't unusual, according to experts. Every business is vulnerable to corporate fraud, usually committed by a trusted worker.

Fraud is so pervasive that it costs the average business 6 percent of its annual revenue, or $4,500 per employee, according to the Association of Fraud Examiners in Houston.

While scandals at Enron Corp., Tyco International and Allfirst Financial have put the issue center stage, small businesses like the 110-employee Falter Co. are far more likely to be victims.

The average extortion, embezzlement and theft scheme cause an average of $127,000 in losses to small companies, compared with $97,000 for large businesses, according to the association.

The crimes range from stealing office supplies to creating fictitious companies that embezzle millions of dollars.

"Fraud is probably going on in every business every day," said Toby F. Bishop, president and chief executive officer of the Association of Fraud Examiners. "The question is how big it is and when it gets caught.

"What we're seeing today is the increase of mega-frauds, the fraud in large businesses with multimillion-dollar impacts," he added. "But fraud has been chugging along merrily in small businesses for years and shows no signs of letting up."

The embezzlement at the Falter Co. was the worst the company had suffered since the Falters began delivering candy by horse and buggy in 1878.

And it was committed by one of its best salespeople.

The woman had worked at the company for 18 months selling candy and gum to convenience stores and gas stations.

One day, however, she informed the accounting department that a client who owned several convenience stores couldn't pay his entire bill because he had just opened a new store and was short on cash.

"Our accountant never really questioned it," Falter said. "The guy always paid in cash and he always paid on time. He was a model customer."

When she told the same story a few months later, Falter's accountants began asking questions.

The probe showed that the convenience store owner had paid his bills all along, but Falter Co.'s saleswoman had pocketed the cash and fabricated stories to cover her tracks. When the storeowner questioned discrepancies on his invoice, she blamed it on kinks in the new computer system.

The company fired her. But the fraud cost it thousands of dollars, dozens of lost hours to investigate the crime, and its insurance company dropped its coverage of the company.

Fraud experts say small companies often leave themselves open to crime because of their size. One employee may be given full control of the books, allowing schemes to go undetected for months.

And audits usually aren't the norm as they are at larger companies. Small firms also may not have the resources, time or staff to perform extensive background checks on applicants.

"Where companies and agencies get into trouble is when they put into one person's control too many functions," said Carolyn Henneman, chief of the criminal investigations system for the Maryland attorney general's office. "A small business often doesn't have the money to hire a person to do each role. They often cut corners because they have to."

The head chef and dietary manager at Harmony Hall Retirement Community in Columbia, was able to buy $20,675 in lobster, shrimp and other expensive seafood on the company's dime because there was so little oversight over his spending, company executives said.

Over two years, beginning in September 1998, the chef ordered bulk orders for the retirement home, and added in smaller orders to supply that he used at a Fells Point restaurant where he worked. Because he always stayed within his budget, company officials never monitored his buying habits.

The scheme was discovered when a co-worker saw him taking food from the retirement home.

"It was an hourly employee who saw him walking out the door with the seafood," said Norman Snowberger, business specialist for Maryland Health Enterprises, the retirement home's parent company.

As in many fraud cases, the thief was considered a loyal employee and beyond reproach.

"I was extremely surprised," Snowberger said. "I had a close relationship with this individual. We worked together for years. He was a very trusted employee."

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