Fraud Opportunity Reduction

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Another one!! – April 11, 2018: Napa bookkeeper admits to stealing $170,000 from Jefferson Car Wash

March 28, 2018: Napa man sentenced for embezzlement from Sonoma nonprofit agency

April 28, 2017: Prosecutor: Dry Creek General Store hit with $415,000 theft

Stole from his partners: Santa Barbara Winemaker Arrested

According to “How To Keep Your Winery Safe From Fraud & Embezzlement” – presented at the 24th Wine Industry Financial Symposium:

  • 85% are Misappropriation of Assets, involving the theft or misuse of an organization’s assets
  • Common examples include skimming revenues, stealing inventory, and payroll fraud
  • Median loss is $130,000
  • Typically three conditions exist: Need, Rationalization, and Opportunity

Opportunity – Lack of:

  • Supervision and review
  • Separation of duties
  • Management approval
  • System controls

Need – Incentive / Pressure:

  • Personal financial problems
  • Personal vices such as gambling, drugs, extensive debt, etc.

Rationalization:

  • “I really need this money and I’ll put it back when I get my paycheck”
  • “I’d rather have the company on my back than the IRS”
  • “I just can’t afford to lose everything – my home, car, everything”

I personally have been victim or direct observer over my 45 year career of:

– Bookkeeper diverted cash at the point of bank deposit (blamed on my ‘bad math’ until the bank teller said “yes, she always deposits $100 to her account when she makes the company deposit”)

– Volunteer Treasurer of a Volunteer fire department wrote checks to her family members totaling thousands over several years

– Office Manager ordered goods on the company credit card for shipment to her house, and reconciled the card statement

– Purchasing Agent ordered computer equipment on company PO’s for delivery to his warehouse (and when fired [not prosecuted] went to work for an industrial diamond company… imagine…)

– Wine Club Associate placed club orders to themselves and friends, then cancelled them after shipment and refunded the credit card charges

– Sales Administrator set up commission checks to relatives and accomplices over a 7 year period

– Office Manager absconded with product, adjusted inventory inaccuracies, and blamed them on the warehouse person


Areas of risk: Cash, Financial transactions, Inventory, Data, Contracts, purchases

The perpetrator is usually a trusted employee, so everyone thinks the company is not at risk


“While no system will be entirely failsafe, we believe that building better safeguards into internal inventory and accounting practices can reduce the risk and deter future offenders”

– Gary Lieberstein, Napa County District Attorney

What you can do to reduce the “Opportunity” factor:

  • Map the current processes and practices (often found to be quite different that what was originally established)
  • Re-design the workflows so that no individual has access or responsibility for all aspects of a financial, sales, or inventory process – Separation of Duties (aka “Dual Control”)
  • Review the system security/access tables and relate them to the process maps
  • Get into compliance with the Payment Card Industry (PCI) rules
  • Look for unusual ratios or expenses; audit labor contracts, use of supplies, contractors, etc.
  • Require separate approval of Journal Entries and inventory adjustments
  • Have bank statements mailed directly to the owner or first access to unopened monthly statements restricted to the owner
  • Ensure that any computers used for banking are not ever used for general browsing or shopping
  • Distribute paychecks / EFT stubs directly to employees occasionally
  • Make vacations mandatory (surprising what surfaces when someone else has to cover the tasks)
  • Establish clear coverage assignments for absences and vacations that maintain dual control
  • Do periodic surprise inventory counts
  • Run scenarios with disinterested parties and highlight other points of opportunity
  • For Visitor Centers: Do a rough comparison of tasting room bottle transfers to sales/pours (or “count corks”)

While nothing will absolutely prevent fraud or misappropriation, these actions plus clear policies (with enforcement), and background checks before hiring will eliminate the common opportunities, and a secondary benefit of the mapping and re-design is typically increased process efficiency!