Corporate Theft

When asked why he robbed banks, the 1940s criminal, Willie Sutton answered, “Because that’s where the money is.” The quote has passed into popular history, and it has proved useful in many areas, including the learned professions.

In Where the Money Was, a book he wrote after leaving jail, Willie explained that medical schools adopted as a diagnostic tool “Sutton’s Law” — the idea of looking for the obvious, before going further afield. Considering he robbed over 100 banks and spent half his life behind bars, Willie was a surprise to those who met him. He was an intelligent, reflective man who avoided violence. He was also a non-threatening charmer — which was why he was able to escape from three prisons. And although he never realized it, Willie was a great instructor. He can still teach us things about theft.

What things? First of all, there’s “Sutton’s Law,” which reminds us that a thief will look for the obvious — he’ll strike where you’re vulnerable and where the money is. Second, Willie’s career is testimony to the fact that the most successful thieves will use your expectations against you. Willie describes in his first book how he discovered a fundamental truth. Disconsolate after a botched safe-cracking job, he watched as an armoured truck pulled up to a bank. Uniformed guards climbed out and knocked on the bank window. Moments later, the locked doors were opened and the guards strolled in. After 10 minutes, they exited the bank carrying bags of money. Willie couldn’t believe what he was seeing. He realized you didn’t have to tunnel under the floor, use nitro, or brandish weapons. If you wore the right uniform, the bank would give you the money. At that moment of enlightenment, Willie Sutton the actor was born.

If your practice is robbed, it’s likely to be by an actor like Willie: an intelligent, charming person who convinces you that he has an extraordinary work ethic. Often the actor will be a long-time employee who has earned your trust with years of service. This trusted employee will use your expectations against you, and, of course, will operate where the money is.

Where are you most vulnerable? A crook can take your money in three ways: (1) creating fraudulent expenses, (2) diverting cash, and (3) stealing services.

Many companies have lost money through a fraudulent expense scam. The scams work this way. Your company receives phony invoices for services or goods. If the invoices are paid, the thief is successful. Obviously, the more knowledgeable the thief is with your operations, the more likely he’ll be able to achieve his goals. The phony invoice scam is easy for a person in charge of your payables to perpetrate.

Diverting cash is a scheme that can be used by someone in charge of your accounts receivable. In this scam, the thief controls cheques coming in from your customers and deposits them into a bank account that he or she has control over. It is much easier than many people believe. For example, if your company is called Davidson Engineering Limited, it’s quite possible for someone to incorporate another company called Davidsson Engineering Limited. It’s likely a bank would allow Davidsson to deposit into its account cheques made out to the other firm.

How long can this kind of scam go on? That depends on how clever the thief is at circumventing your financial controls. If he or she is able to issue credit notes to remove diverted items from your accounts receivable listing where they can be viewed, the activity could go on indefinitely.

An ambitious version of this fraud is actually to steal the services you provide. To do this, the thief creates an alternative billing system. For example assume Davidson Engineering obtains a client and provides service, but the thief is able to send out invoices on Davidsson Engineering stationary with an address and return envelope that brings the payment to another location. Then the thief can deposit the cheque without fear of someone looking over his shoulder. If the receivable is not recorded in Davidson’s records, no credit notes or cover-ups have to be created. The work provided simply has no revenue attached to it. Very elegant!

Protective measures

How can you best deal with the problem of dishonesty? There are some important rules:

Employ people worthy of trust. Before hiring, perform a careful background check on job candidates. Discuss the person’s honesty with previous employers. Check for a police record. Consider including an honesty test in your hiring process. The whole hiring team should discuss how they feel about the employee. Does something bother them? Does the candidate give off worrisome vibes?

Make it hard to steal. In many cases, the best defence is supervision. Make sure an independent supervisor oversees bookkeeping tasks. Separate duties so that one person does not control both assets and the accounting for those assets. Perform unscheduled audits of bookkeeping. Make sure your records are well organized and up to date. Make sure your work in process tracks into the receivables system. Become very sensitive to customers who claim their payments have not been recorded properly. Be suspicious of employees who avoid taking holidays.

Have clear policies and work together on them. Your company should distribute clear written policies on ethical behaviour to be signed and periodically re-signed by each employee, including partners, principals and shareholders. You should emphasize that no infractions will be tolerated. Be self-aware. Employees know if owners and senior managers are in the habit of exploiting business assets. You can’t expect other people to be honest if they see senior personnel breaking the rules. Whether you like it or not, your behaviour sets an example that your people will follow.

Use a stick and carrot approach. The stick: employees are less likely to steal if they believe they’re likely to be caught. Let them know that you have ways of ascertaining theft, through accounting analyses and the division of duties. Training and awareness programs are useful, especially when you demonstrate the huge impact on profits of employee theft.

The carrot: employees can be encouraged to stop theft if they are rewarded for improved loss statistics. It’s important to teach your people that theft can injure the company and put their jobs at risk. The habit of minor theft can easily generate losses of 5% of sales. That can push your profits below the acceptable level for inexpensive financing.

Hank Bulmash, MBA, CA is a principal of Bulmash Cullemore, chartered accountants of Toronto. E-mail hbulmash@bulmashcullemore.com