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Insider Threats: Identifying Fraud by Trusted Employees

by | Sep 18, 2024

A thriving company with 60 employees, a warehouse buzzing with activity, and a future full of potential. Then, at the hands of a trusted employee turned fraudster, the business is reduced to just five workers and is being run out of a 120-square-foot storage unit.

This is the real-life nightmare being experienced by Robert Wilson Sr., owner of Wilserv Corp., an air conditioning company in Louisiana. Wilson’s former bookkeeper, Megan Bagley Rivolo, allegedly stole as much as $800,000 and left Wilserv in ruins. Four years on from discovering the fraud, Wilson’s still waiting for civil and criminal trials against Rivolo to proceed.

Sadly, this heartbreaking story is not unique; insider threats are an ever-present danger. As a forensic accountant, I’ve seen firsthand how internal fraud can devastate a business, especially small and medium-sized enterprises, where owners place a lot of trust in their close-knit teams.

So how does fraud like this happen, and how can small business owners protect themselves? Let’s break it down.

The Quiet Threat

The problem with insider fraud is that it often starts small and, therefore, goes unnoticed. In Rivolo’s case, the scheme allegedly began with minor purchases made on the company’s dime at local gas stations and graduated to lavish vacations to Las Vegas and Paris and other luxury purchases. She also allegedly opened secret credit cards and bank accounts that she “used to pay herself double and transfer even more money to her husband,” according to a local news report on the scheme.

Fraudsters are often trusted employees who know the system inside and out. They’re familiar with their company’s controls (or lack thereof) and can manipulate records to cover their tracks. That’s exactly what Rivolo is alleged to have done. Wilson was aware that his business appeared to be quickly burning through cash, and he tried to get to the bottom of the problem. Unfortunately, he went to Rivolo, his bookkeeper, for information. She diverted attention to insignificant purchases by other employees—thus making it seem like she was a diligent, trusted guardian of the company’s finances, Wilson has said.

The fraud was discovered only when Wilson found a $700 invoice for tires that he had not purchased. From there, Wilson dug in and found hundreds of other fraudulent charges. Rivolo was arrested in July 2020 and charged with felony theft. Her trial has been pushed back 17 times, however, because of COVID-19, scheduling conflicts, and her decision to change attorneys.

Red Flags You Can’t Ignore

Small business owners juggle many responsibilities, but ignoring the warning signs of fraud could cost them dearly. Here are some of the red flags that might indicate your business faces a threat from an insider:

Unexplained Financial Discrepancies: If the numbers don’t add up, don’t brush it off. Wilson felt something was wrong when his company was bleeding money despite booming business. Always investigate financial anomalies, no matter how small.

Lifestyle Changes: If your bookkeeper, office manager, or any other employee suddenly seems to be living beyond their means—luxury vacations, fancy cars, or expensive gadgets—without a corresponding change in income, it’s worth taking a closer look.

Control Issues: Be cautious of employees who are overly defensive about financial data or insist on having exclusive control over the books. Fraudsters thrive in environments where they can operate without oversight.

Reluctance to Take Vacation: A reluctance to take time off might indicate that someone is afraid their scheme will be uncovered in their absence. Make vacations mandatory and have someone else review their work while they’re gone.

Frequent Vendor Changes or Unfamiliar Payments: Unexplained payments to new vendors or unusual purchases should be closely monitored. These could be attempts to siphon company funds.

Steps to Spot Fraud Early

The earlier business owners catch fraud, the better their chances of stopping it before it causes irreparable damage. The following five steps can help business leaders take action to protect their companies:

1. Segregate Duties: One of the most effective ways to prevent insider fraud is to ensure no single employee has control over all aspects of a financial transaction. Separate the responsibilities of authorization, custody, and record-keeping. For example, the person handling cash should not be the same one reconciling the bank accounts.

2. Regular Audits and Reviews: Internal audits or financial reviews, whether formal or informal, are essential. If you can’t afford a full audit every year, even a periodic review of your financials can help spot anomalies.

3. Implement Strong Financial Controls: Use accounting software that tracks every transaction, requires approvals, and allows for easy monitoring. Ensure that employees don’t have unauthorized access to sensitive financial data.

4. Create a Whistleblower Policy: Encourage employees to speak up if they see suspicious activity. Many employees fear retaliation, so ensure anonymity and protect whistleblowers from repercussions.

5. Use Forensic Accountants: Bringing in an accountant who specializes in forensic investigations can help identify complex fraud schemes. We’re trained to spot anomalies that others might miss, and we can help business owners establish controls to prevent future fraud.

Don’t Wait Until It’s Too Late

Robert Wilson’s story is a cautionary tale for any small business owner who thinks, “It can’t happen to me.” Insider threats are real, and the consequences can be devastating. As seen in the Rivolo case, most fraud cases begin with much smaller amounts that often fly under the radar.

The key takeaway? Trust is crucial in business, but trust must always be accompanied by verification. As forensic accountants, we’ve seen the aftermath of unchecked insider threats, including families losing businesses they spent decades building, jobs lost, and dreams shattered. If there’s one thing we’ve learned in our forensic investigations, it’s that fraud doesn’t announce itself. Don’t let it happen to you. Take action now, implement strong controls, and stay vigilant.

If you’d like to discuss how you can better protect your business from insider fraud or need help with a specific concern, please reach out to us. We are here to help you safeguard what you’ve built.

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