John G. Schmidt Jr. Discusses Workplace Fraud

Workplace fraud threatens all employers

A business manager at a medical office pockets co-pays paid in cash. A payroll administrator gives himself a hefty salary increase. A salesperson siphons company business for personal gain.

It’s called workplace fraud and Buffalo attorney John Schmidt Jr. sees a lot of it.

“It happens when opportunity meets needs meets a weak moment,” said Schmidt, a partner at Phillips Lytle LLP and co-leader of the business litigation practice team. “Then it’s off to the races.”

Workplace fraud occurs worldwide at businesses both small and large. Consider this from the Association of Certified Fraud Examiners Inc. in the 2016 Global Fraud Study: The typical organization loses an estimated 5 percent of annual revenues to fraud activity, with a median loss of $120,000 in the United States.

Billing schemes and check-tampering schemes were the most common forms of fraud, which occurs most often in banking and financial services, government and public administration and manufacturing, according to the report.

In Western New York, there have been plenty of instances of workplace fraud, though some are not publicized. Schmidt said he’s currently dealing with 12 cases.

“I have seen wildly aggressive thefts by hourly employees and co-owners of businesses, by executives and by lawyers,” he said. “By and large, it usually involves a breakdown of internal controls and segregation of duties. People who are handling the cash are also handling bank deposits. Folks who are making purchases are also paying the bills.”

Some attorneys saw an increase in occupational fraud cases during the financial crisis and for years afterward. Brian Gwitt, partner at Woods Oviatt Gilman LLP in Buffalo, said he handled “a number of cases” from 2008 to 2013.

“Think about that time. Lending tightened up, where before the money was free. Now all of a sudden people were tapped out,” Gwitt said. “Credit was restricted. There were no new lines available. People had to find ways to fund what was an out-of-control lifestyle.”

So what can employers and business owners do to better protect themselves from workplace fraud? It comes down to buying the appropriate business insurance coverage and ensuring that internal controls are in place to deter fraud.

In the latter case, auditors can play a crucial role in helping companies identify and correct most areas of weakness.

Chiampou Travis Besaw & Kershner LLP, a public accounting firm in Amherst, conducts independent audits for larger companies that would reveal any deficiencies. But the firm is also called on by small companies that want to improve their systems and processes.

Partner Kelly Besaw advises small-business owners to be involved in financial transactions. He said owners of larger companies should establish a separation of duties that prevents one person from handling transactions from start to finish.

“It’s also important to be alert to situations that create motive for employees,” Besaw said. “Many employees may realize they have opportunity, but until they’re faced with motive, they’re not actually going to commit fraud.”