Trust, but verify

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Sound internal controls can head off fraud before it costs you a penny.

“She was with me a long time, and I trusted her with my checking account.” That’s how Daniel Gamblin begins the story of how he discovered an employee had robbed his company of more than $93,000 over eight years.

Gamblin – owner of 25-truck flatbed carrier D&R Trucking in Pratt, Kan. – happily let his longtime bookkeeper and secretary write checks and handle other key financial tasks. “I was so busy on the dispatching side that I just didn’t have the time for all that,” he says. “What I learned was, you’ve got to find the time.”

In hindsight, Gamblin sees the warning signs clearly. “She was often late getting me the financials, when I asked for them,” he says. “There was always some excuse why she couldn’t generate the report immediately. And she was always talking about wanting to help her kids, her adult kids.”

When Gamblin’s wife, Rose (the R of D&R), started helping in the office, the bookkeeper “started getting a little spooky and a little strange,” Gamblin says. When the bookkeeper left in 2003, the Gamblins learned why.

“There are 52 weeks in a year, and when you have 62 paychecks going out to the same person, that kind of raises a red flag,” Gamblin says.

The bookkeeper had been writing unauthorized checks to herself and to her husband, also a D&R employee, for years. She got away with it because D&R was thriving. Employees and creditors were being paid on time, and profits were good. There was no sense that money was going down the drain, Gamblin says.

Dozens of cases in recent years have generated headlines – trucking fleets bilked of fuel, petty cash and settlement money; fleets buying equipment and supplies that land in other companies’ yards; and employees and contractors stealing trade secrets, filing fraudulent workers’ compensation claims and even using fleets as a cover for money laundering and other crimes. Many other misdeeds never make the headlines. Fleet owners try to deal with them quietly, if they deal with them at all. But ignoring these problems won’t make them go away.

A universal need
According to the Association of Certified Fraud Examiners, fraud on average costs U.S. organizations 5 percent of their annual revenue. With a U.S. gross domestic product of about $13 trillion, that’s more than $600 billion lost to fraud each year.

Unless you don’t mind losing this money, you need internal controls: financial rules and routines that manage drivers, trucks and dollars “to know who’s spending and when and how they’re spending it,” says Nancee Ronning, vice president of sales at T-Chek Systems.

There is no one-size-fits-all set of control procedures, Ronning says. Rather, all fleets need some procedures that let employees make legitimate transactions while blocking any illegitimate transactions they might be tempted to make. “When it’s done right, it is very, very effective,” she says.

Even if you are sure you can trust your managers and employees, you still need internal controls, says Kenneth DeWitt, a CPA and partner in the firm Tidwell DeWitt. DeWitt likens it to one of Ronald Reagan’s famous quips. At their December 1987 meeting in Washington to sign a nuclear-arms treaty, President Reagan told Soviet leader Mikhail Gorbachev that the U.S. attitude could be summarized in the words of an old Russian proverb: “Trust, but verify.”

If no verification procedures are in place, merely trusting employees on no evidence eventually “can blow your business up,” DeWitt says. “Investigate with the benefit of the doubt, but do investigate.”

“People tell us, ‘Oh, we’ve done it this way for years, and we’ve never had a problem,’ but it just takes once or twice,” Ronning says. “They need to think about these things in a new way.”

Tex Pitfield certainly learned this lesson. In April, a longtime customer called Saraguay Petroleum, a 25-tanker fleet in Atlanta, to report being shorted 1,000 gallons by “one of my best, most seasoned, most trusted employees,” says Pitfield, Saraguay’s chief executive officer. “We assumed it was a mechanical error.”

Two weeks later, Pitfield got another call from the same vendor reporting another shortfall – after a visit by the same driver. “That sort of raised some flags,” he says.

Pitfield pulled the driver’s record and found a number of shortfalls, from 500 to 1,000 gallons, “always on large accounts.” He checked the driver’s GPS record and kept finding the same weird address, which had been flagged by the system but not followed up on, since it was near a major intersection, I-675 and I-285.

When Pitfield called the cops, he learned that the location – a nondescript trucking yard with a four-bay garage – already was under surveillance for suspicious nighttime activity. He accompanied the cops to the site and discovered, hidden beneath a tarp, an old tanker full of fuel.

The police raided the place that night, discovering the garage contained an entire off-the-books nightclub: two fully stocked bars, a giant-screen TV, gaming tables, stages with poles for exotic dancers, bulletproof windows, even a metal detector at the entrance. Drug paraphernalia was everywhere. Its regulars called the joint “Da Yard.” Out back was a house trailer “where the girls operated,” a “chop shop” for stolen vehicles and the illegal fuel depot, Pitfield says.

The driver was arrested when he showed up for work. Pitfield’s regret at the situation went beyond the theft. “This guy was a tremendous loss to our operation, because he did such a great job,” he says. The driver was a three-year employee, on track to make a legit $65,000 this year. “How much did he make for stealing 500 to 1,000 gallons? Maybe a couple hundred dollars cash? He could have made that by working any extra day.”

Without GPS, which Pitfield had installed only this past fall, the driver probably would have gotten away with the theft, Pitfield says. “It’s impossible to monitor 15 employees every minute of the day. You can spend a fortune on electronic monitoring and valve monitoring, but where does it stop? And what the hell happened to just being able to trust your employees?”

If you don’t look for fraud even when you don’t suspect it, you might not recognize it until it’s too late, advises Paul Cogswell, vice president of loss prevention and risk services management at Comdata. Even big-money fraud usually starts small. “No one wakes up one morning and says, ‘I’m going to steal $50,000 from my carrier in fraudulent invoices,’ ” Cogswell says.

Success in trucking depends on moving freight efficiently and maximizing your profit margin. Minimizing fraud control helps you do both, Cogswell says. “Good fraud control is good expense control.”

An ounce of prevention
Catching and punishing perpetrators may be gratifying, but by the time you identify fraud, the damage is already done. That’s why the most effective internal controls are those that focus on prevention. Sound fraud prevention measures achieve certain goals:

Look for exceptions. “Fraud is all about averages,” Cogswell says. “Fraud is not the average – it’s the exception. To look for employee fraud is to look for the out-of-the-ordinary.”

Think of your company’s money flowing through a transparent tube, Cogswell suggests. You want to keep the tube as free of obstructions as possible so that the money gets where it needs to go, but you also need to be able to look at it whenever you please.

“You want easily read expense reports and reviews that point out the average and flag those that are not average,” Cogswell says. “Then you can ask, why is this driver using more fuel than these other drivers on similar routes? Why are this driver’s maintenance costs twice as much as the others?”

Run spot checks. “Question something every now and then,” even if the item seems ordinary, DeWitt says. “Pull out a check and ask to see the bill, so that you can compare them. Pull the customer’s account and ask to see the record.” Pick a cell on a spreadsheet and say, “Let’s drill into this number.”

“You’re looking for things that just don’t make sense or aren’t supported by evidence,” DeWitt says. “Consider it like a random drug test. Just pull random numbers and see if they’re within expectations.” If they aren’t, find out why not.

Be tactful. Remember that most discrepancies are easily explained, so practice nonjudgmental ways of asking necessary questions:

“Bob, I noticed that your repair expenses this year were twice what they were last year. Can we talk about why that was? Do we need to get you in a better truck, or are there other things we need to change?”

“You know, Lucy, this just doesn’t make sense to me. Could you help me by pulling these files and going over them with me, just so I would be comfortable with it in my mind?”

Split up jobs. Segregating duties is essential, DeWitt says. Split up related financial duties among multiple employees – or even multiple departments – and monitor each one, the goal being to make sure “one person is not in a position to intercept the money and cover up the evidence. A lot of small companies fail in this miserably, and a lot of big companies do, too,” DeWitt says. Multiple employees could still collude to defraud you, but you greatly reduce your risks.

Control the spend. Money coming in must be properly deposited and credited to the proper customer’s account so the proper bills can be generated. Money going out must be only for budgeted, approved and documented purposes. Fleet card services now are quite sophisticated, enabling managers to block or flag certain transactions automatically, based on how the fleet prefers to do business.

In helping customers minimize their fuel-theft risk, Ronning says, T-Chek recommends that fleets adopt rules to govern fuel buying precisely. Define who can buy fuel, how often, where and in what quantities or dollar amounts. Make sure you have a system for catching exceptions. A driver who fills up in the yard at noon may be tempted to “rent” his fuel card a few hours later to a fellow trucker at a truck-stop island, Ronning says.

Don’t overlook employees who have left or been fired. Make sure your operation promptly deactivates fuel cards for all departing drivers, Ronning warns.

Focus on the manageable majority. Cogswell contends that the few employees who are intent on ripping you off will work at defeating any internal controls until they give themselves away. But most employees who might occasionally be dishonest would respond to some sort of risk-and-reward system, a set of checks and balances that everyone in the company is aware of. Those workers should be your principal focus, Cogswell says.

Spread the word of honesty. “You’ve got to give people the perception of detection,” Cogswell says. “You at least want your employees to think you’re looking over their shoulders, even if you’re not,” DeWitt says.

Never say, “I don’t care how you do it, just make it come out right,” DeWitt adds. Word will spread that you are lax, and someone in the organization will take advantage. If you encourage bookkeepers to cut corners, you blur the distinction between financial truth and financial fiction.

Don’t leave the job to someone else. When veteran entertainer Elton John unsuccessfully sued his former managers in 2001, claiming they had cheated him, he admitted on the stand that he was wholly uninterested in looking at his account books, however much he was urged to do so. “I expected these things to be taken care of in my behalf,” he testified.

Even if you prefer working with equipment or dealing with drivers and customers, eventually “you’ve got to concern yourself with the money,” DeWitt says. “Just having an accountant involved does not automatically release you from being vigilant and staying on top of things yourself.” You are in a much better position to detect fraud than an outside auditor because you are there every day.

You never can eliminate fraud, but you can be vigilant enough to keep it on the run, Cogswell says. And fraud control is really pretty simple, he adds. “The world turns on the almighty buck. Follow the money, and you will find the fraud.”

You’ve been ripped off – now what?
When fraud happens, prosecute. Often fleet executives are too embarrassed to admit publicly that they were fleeced. Or they fear that rivals will benefit from the details of business procedures that might be revealed in open court. Prosecuting fraud also is time-consuming and expensive; hiring the necessary auditors and lawyers can look like throwing good money after bad.

Pitfield believes the trucking industry can’t address the problem of employee theft and fraud if fleets don’t talk openly about it, share their hard-won knowledge, and prosecute. “My intent is to send this guy to prison,” he says. “I want to send the message, ‘If you try to steal from me, you will suffer the consequences.’ ”

Incredibly, business executives sometimes don’t terminate or even demote or discipline the offender. “That just baffles me,” DeWitt says. “I expect some people to lie to me routinely – salesmen, for example – and that’s OK. But I never would tolerate a lie from anyone that handles any of my money.”

If you know the employee has financial, medical or emotional problems, or some sort of addiction, you might try to get him some help – but don’t leave him in a position where he’ll be tempted to steal again.

Aside from the important example you set for other employees, pressing charges might help you recoup some of your losses. In the case of D&R Trucking, the bookkeeper ultimately struck a deal with prosecutors to plead guilty on three of the 20 counts. She was sentenced in March 2006 to five months in prison plus three years of supervised release. And she was ordered to repay D&R the sum of $93,924.36.

“We actually are seeing some of this, in small amounts,” Gamblin says. “The money does come in. It may take 25 years, but we are getting it.”

But more importantly, Gamblin believes his company is stronger for the experience. Now only D or R writes checks at D&R. Gamblin recommends that companies prohibit the person who authorizes checks from also writing them. He suggests that any checks above a certain amount require an OK by the boss. Gamblin also thinks it’s a good idea to have books audited regularly by an outsider, and to cover any employee who handles money with a fidelity bond or similar insurance policy in case of theft or other misdeeds.

“She did it in such little amounts, over such a long period of time, that it was hard to catch,” Gamblin says. “But if it had all occurred in a single month or two, it could have put us out of business real easy.”


Who’s the typical embezzler?
Credit reports can reveal telltale signs

Accounting firm Gray, Pilgrim & Associates of Chambersburg, Pa., says the typical embezzler in a small office is a control freak who:

  • Takes full responsibility for all transactions.
  • Keeps the records inaccessible to others, often according to some arcane filing system.
  • Discourages anyone else, even managers, from asking questions about how things are done or why they’re done that way.
  • Works long hours and feels underpaid, overlooked or otherwise taken for granted, so that the employee begins to feel entitled to some of the office money.

Fraud experts advise watching for behavior changes in employees and co-workers, including signs of depression, anxiety, unpredictability and reluctance to share the details of their work. When running credit reports on potential hires, look for potential chronic problems such as high personal or household debt, and run criminal background checks on anyone whose job would involve handling money.


Ghosts on the payroll
Nonexistent workers may be pocketing real cash

A company may be haunted by “ghost employees,” nonexistent workers that someone has added to the payroll in order to collect their wages. Austin, Texas, CPA Joseph Wells, writing in the Journal of Accountancy, describes techniques for exorcising these spirits.

  • Be familiar with the look of payroll summaries actually printed by your system, so that you’ll spot different typefaces or other discrepancies in printouts handed to you.
  • Look for employees with ID numbers outside the usual sequence; they may be separated to keep them from showing up in printed reports.
  • Look for duplicate names, addresses, Social Security numbers and bank-account numbers.
  • Look for repeated surnames, as fraudsters sometimes put their relatives on the payroll. Look for the names of employees who have left the company, employees who have died – even, believe it or not, celebrity names. (“I didn’t know we had a Jennifer Aniston working here!”)
  • Do spot checks to make sure each employee whose name you don’t recognize has a personnel file and proper withholdings.
  • Make sure the total amount budgeted for payroll – each pay period, quarter and year – matches the actual disbursement.

Help is out there
The Association of Certified Fraud Examiners has an online Fraud Resource Center at this site, and its biweekly FraudInfo e-mail newsletter is free.