Signs of Embezzlement


As a forensic accountant, I’ve seen egregious fraud committed over the years. After discovering embezzlement, business owners and board members invariably make two observations:
1.    The violation of trust hurts more than the monetary loss.
2.    Looking back, there were signs.

What are the signs that become evident after the fact?

The Association of Certified Fraud Examiners lists several red flags exhibited by fraud perpetrators. The two most common are living beyond one’s means and financial difficulties. These two go hand-in-hand, like cause and effect. For example, buying things you can’t afford results in excessive credit card debt which leads to financial problems.

The owners of Isom Industrial Metals in Caldwell, Idaho learned this lesson the hard way. In 2008 Jacqueline Grandstaff, Isom’s former bookkeeper, was sentenced to 19 years in prison for embezzling over $1 million from Isom, her employer of 14 years.

What was her financial need? She needed to pay off credit card purchases like travel, vacations, gambling, jewelry, plastic surgery, home furnishings and other "necessities.” Grandstaff wrote checks to her credit card companies and covered up her transgressions by recording them as payments to legitimate vendors.

There were many signs Grandstaff was living beyond her means. For example, even one round of plastic surgery is not likely affordable on a bookkeeper’s salary, yet Grandstaff went under the knife more than once. Frequent deliveries to Isom of personal purchases like Tiffany lamps, rugs and framed prints were also suspicious for a single person working as a bookkeeper. A $50,000 SUV and the purchase of several ATVs were over the top.

Someone who is dipping into the cookie jar will typically explain away such extravagance as the result of lottery winnings, lucky bets on the ponies, an inheritance, or gifts from an admirer. Such extraordinarily good "luck” should be viewed with skepticism.

Once suspicions were aroused, Grandstaff exhibited more classic signs that something was amiss. She became irritable and defensive when management requested information about the company’s financials. Management was trying to understand how profitability could be so poor when business was so good. (Remember, this occurred pre-recession.)

"Loss” of documents is a common part of the cover up; the embezzler cannot prepare requested reports because the information is lost, was accidentally shredded, was eaten by the office pet or was confiscated by a gnome dressed in BSU colors. (Yes, the excuses can become downright silly!)

After years of living beyond her means, Grandstaff’s web of deceit unraveled. Isom owners wanted to give back some of the profits to employees, but a closer look at the financial records led to the discovery that Grandstaff had already taken a portion of the profits. Instead of rewarding loyal employees, Isom hired investigators to quantify the company’s losses and establish better checks and balances to prevent future embezzlement.

The inevitable signs of dishonesty are far more apparent in retrospect than in real time. Different people see different signs at different times. The signs don’t form a coherent picture until after discovery,

Business owners can spare themselves the "I should have seen it” anguish by building accountability and transparency into financial workflows. As is common in embezzlement cases, Grandstaff controlled the financial process with little oversight and few checks and balances. While it’s impossible to prevent embezzlement, the type of theft perpetrated by Grandstaff could have been detected sooner had there been more accountability.

Denise McClure brings over 20 years of experience in public accounting, business management and non-profit board involvement to her work as a Certified Public Accountant (CPA) and Certified Fraud Examiner (CFE).  Her business, Averti Fraud Solutions helps businesses and non-profit organizations become more profitable, secure and efficient by creating accountable and transparent work environments.

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Tags: fraud, signs of fraud, embezzlement

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