Episode 91: Embezzlement and Occupational Fraud with Ben Kincaid, CPA, CFE, CFF, CVA
In this season of The Data Sleuth Podcast, titled "Conversations about Fraud," guest host Justin Burns, managing partner of Space Coast Forensics in Brevard County, Florida, tackles topics including embezzlement, collaborative divorce, economic damages, construction fraud, and more. In each episode, Justin is joined by an industry expert to help tell the story behind the numbers and explore the latest in fraud detection and prevention.
In today’s episode we discuss embezzlement cases with Ben Kincaid, CPA, CFE, CFF, CVA. In this episode, Justin and Ben discuss:
What is the true cost of fraud?
Asking clients to tell you about the weird things.
A purchasing card program embezzlement involving a pawn shop and an eagle-eyed sheriff’s deputy.
One simple thing that small business owners can do to help spot fraud earlier and prevent losses from piling up.
GUEST BIO
As a forensic, litigation, and valuation expert, Ben regularly works with law enforcement, attorneys, government agencies, and clients on civil and criminal matters. He regularly serves as an expert witness in employee malfeasance, breach of contract claims, economic damages, due diligence, and valuation disputes. Ben also works with organizations of all sizes across the spectrum with internal control assessments and various business consulting services. From his data analytics to his well-written, defensible reports, Ben provides unique solutions to resolve the complexities that organizations face in today’s ever-changing environment.
RESOURCES MENTIONED IN TODAY’S EPISODE
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LinkedIn: Justin Burns, CPA, CFE
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Transcript:
Leah Wietholter:
Hi. I'm Leah Wietholter, CEO and Founder of Workman Forensics, and this is the Data Sleuth Podcast. For the 2024 season we are changing it up a bit. I've invited Justin Burns, a forensic accounting professional and fraud fighter, to guest-host the episodes. He's one of the friendliest and most personable professionals I've met in this space and I'm excited for you all to meet him and his guests.
Justin Burns:
Hi, everyone. As Leah mentioned, I'm Justin Burns, Managing Partner of Space Coast Forensics in Brevard County, Florida, and I'm your host for this season of the Data Sleuth Podcast. I'm excited to host this season titled Conversations about Fraud where we'll tackle topics including embezzlement, collaborative divorce, economic damages, construction fraud, and more. In each episode I'll be joined by an expert to help tell the story behind the numbers. In today's episode of the Data Sleuth Podcast I'll be speaking with Ben Kincaid about embezzlements and occupational frauds. Our conversation will cover topics such as what is the true cost of fraud? Why you should always ask your clients to tell you about the weird thing they saw that they maybe didn't report at the time? A purchasing card program story about an embezzlement involving a pawn shop and an eagle-eyed sheriff's deputy. And what's one simple thing that small business owners can do to help spot fraud earlier and prevent losses from piling up?
Ben is a Carr, Riggs & Ingram. He specializes in forensic accounting, litigation services, and also is a valuations expert. He holds credentials as a CPA, a certified fraud examiner, a certified valuation analyst, and he's also certified in financial forensics. Ben is originally from Alaska, although now he lives in Florida. He loves the outdoors and apparently has one too many regaling bear stories. Thank you so much for joining us, Ben.
Ben Kincaid:
Well, thanks for having me.
Justin Burns:
All right. And you spent your career investigating embezzlements, frauds, and business, occupational fraud, whatever you want to call it. And I know you have so many stories to pull from. So many cases that you've worked with with their interesting details of their own. And that's really the best way to talk about these types of cases. I'm really looking forward to today's conversation. First, I know you work on many, many different types of cases, as we've mentioned in your bio, but what do you enjoy specifically about helping business owners and business clients who have faced an embezzlement situation?
Ben Kincaid:
Sure. I think as accountants we certainly bring value to our clients in whatever we do as far as preparing books or tax returns or working on audits. But particularly as a forensic accountant, that value is experienced much more and so much more valued by our clients in these types of situations. In some of these cases, we're working through with our clients in what may be some of the darkest days of their businesses. And helping them get through those dark days, helping them succeed later on by implementing additional controls, maybe recouping some of those funds, in relation to the embezzlement, and getting them in a better situation moving forward. And that's what I really enjoy is helping the clients in these situations. And then in the aftermath, seeing how their business succeeds moving forwards because of the work that we did.
Justin Burns:
And that's always a really rewarding part is seeing them come out of the other side of this.
Ben Kincaid:
Absolutely.
Justin Burns:
You and I spoke in a prerecording conversation about how sometimes people don't realize the true cost of fraud from a financial standpoint and otherwise. That was something that you really were passionate about. Can you tell me more about that?
Ben Kincaid:
Sure. There's, obviously, the cost of the fraud itself in terms of the misappropriation or the embezzlement amounts that is quantified as well as the forensic accounting fees or legal fees that may be in relation to that cost. But there's almost always additional costs outside of that. Some of that might be intangible costs such as reputational damage to their image in the community. In other aspects it might be actual real monetary cost.
One of the common schemes that we see in embezzlement investigations is that these embezzlers struggle to account for the business's loss of funds to the owners. In those struggles, one of the prime ways that we see them being able to try and cover their tracks is that they take funds related to payroll taxes that are intended for the Internal Revenue Service or maybe taxes that relate to other state agencies. In that regard, we see that those funds have to be replaced. And then those state agencies or the Internal Revenue Service is charging penalties and interest on top of the amounts that were due in the first place. And so you have the cost of the fraud, you might have the reputational cost, but then you also might have these penalty and interest cost.
One particular case that we were investigating, that's exactly what had occurred is that this particular employee stole several hundred thousand dollars of funds. And the way that they were covering their track, in this particular case ... Because the owner was very cognizant of what's the cash in the bank account and keeping track of what the profits were. They weren't necessarily financial statement savvy or accounting savvy but they certainly knew this is how much cash I should have in the bank and this is how much profit we should be generating. And so this particular employee started not filing their payroll tax returns to the Internal Revenue Service, and they stopped paying those payroll taxes. And then they essentially used those funds to cover the other business expenses or conceal their tracks.
This particular case, that's one of the ways that the owner ultimately found out about the fraud is he had all these Internal Revenue Service notices coming in. The employee had track of the mail and they were discarding those notices. And during the holidays that employee was gone and the owner found one of those notices and was like "What's going on here?" And so they started looking at things. And that's the thread that unraveled the whole scheme. At the end of the day, like I said, the employee took several hundred thousand dollars but the IRS penalties and interest, in this matter, were well above $2 million. That was devastating to the business. So you have those misappropriations that may or may not be covered by insurance proceeds. And then you have this massive interest and penalties that certainly won't be covered by insurance policies, certainly not recoverable. It was very hard for that business to recover from it.
Justin Burns:
I mean, that could absolutely cripple a business, it could destroy a business when you're talking about ... It ends up being multiples of what the actual embezzlement was. I mean, how did the business do afterwards? Were they able to recover? I mean, keep moving on?
Ben Kincaid:
Ultimately they were able to recover. The owner was very entrepreneurial-minded and was able to recover and move forward but it took several years. We negotiated with the IRS also for several years and that had some success but, certainly, they did not wipe out everything.
Justin Burns:
Right. That's part of something else that we talked about was the numbers can tick up and up and up in multiples of the actual embezzlement. But this was a single owner entity that you mentioned. There's also an additional cost in there. I know as accountants, and people who watch the news, we really want to see what's the number, what did the perpetrator get away with. And we talk about what are the additional financial costs. Like you said, the penalties, the interest for these missed tax payments. You've got the legal fees, the forensic accounting fees, things like that. Do you also see that there's an emotional cost there because there's this trust that's been broken?
Ben Kincaid:
Absolutely. Particularly with small business organizations. Most of the people that are able to take these funds, especially a sizable amount of funds, are in that position because they're trusted. They're trusted by the owner. They're most likely have been with them for several years. In some cases I've seen where they've been with them for decades and they've never suspected them. I've never had a business owner come to me and say, "Hey, yes, so-and-so took this money and I suspected them from day one." That's not something you normally hear. It's "I can't believe that they would do this to me."
Justin Burns:
Right.
Ben Kincaid:
And you start hearing the stories from them of "They were in my daughter or son's wedding. I went to their sons or daughter's weddings. We went to family gatherings together." They weren't family but they treated each other like their family. You have that violation of that trust. And especially those close-knit relationships where you have owner and these individuals that are working side by side helping grow the business and ups and downs. And there's definitely an emotional cost to those owners. You see a wide range of emotions from that. We as the forensic accountants almost have to act as, in some ways, a counselor to them to help them get through that time period.
Justin Burns:
Right. I think that's maybe something that doesn't get talked about enough in this community is that ... We're so focused on how much did they get away with and how did they do it, and we sometimes lose sight of there's people at the center of these things. There's people who are suffering much more emotionally than financially sometimes going through these things. That's great that you brought up that sometimes we end up being their counselors on the mental health side going through this because they've had some trust broken and they need somebody to help them through what is a very scary situation and something that people don't go through a lot, having a forensic accountant come in and do an investigation. You don't get a whole lot of repeat clients that have been stolen from more than once in this.
Ben Kincaid:
You would hope not.
Justin Burns:
You hope not, you hope not. You mentioned talking to your clients. It's never a situation where they're like "Oh, yeah, I suspected him from day one." It's "Oh, I had no idea this was going on, this is shocking to me." And you mentioned that when you talk to your clients one of the things that you ask them is, "Did you see anything weird? Tell me anything weird that you might've noticed." And I do something similar whenever I'm on consultation calls. I'm just like "Give me the entire story, every detail, and just let me sift through it." Why do you think it's so important for investigators to have those types of conversations with clients?
Ben Kincaid:
Oftentimes there is red flags within a business or from that individual that precipitates or during the process of them embezzling. Oftentimes those red flags are missed because the owners or the other employees they don't know enough about fraud, they think these individuals are great individuals and that they would never do something. And so they might see something, they might catalog it in the back of their brain by this is not ... The forefront of this is what happened. And it doesn't matter who I'm talking with whether it's the owner or some other individual, whether it's a high-level employee or a low-level employee, I wrap up the interview with, "Is there anything else that you think I should know or be aware of. In hindsight, looking back was there some type of unusual behavior, or something, that may not have seemed like anything at the time but thinking back now, knowing everything that has gone on, that it just makes you pause for a second?" And usually that helps jog their memory and they start thinking about those things. "Oh, hey, well, I never thought about it this way."
In one of my cases that was certainly true. I was interviewing a lower-level employee and wrapped up the conversation with those standard questions. From the face of this interview, I was under the impression that this was a low-level employee, this interview wasn't going to last very long, they weren't very much involved in the financial aspect but they just had a peripheral view of things. And so I started wrapping up the interview and asked that question and this individual was like, "You mean the safe?" And I was like "Well, tell me about the safe."
So this individual started going through and saying that they would collect ... This business had a lot of cash that went through the business on a daily basis, and so this individual was responsible for counting that cash and putting it into a drop safe. This individual would see instances of where she had signed off on a drop into the safe, and the next day she would go into that safe and there was the sheet of paper of her log but there was no cash. Or she would see this other ... The controller in this business go in and take money out of the safe. And so that individual just started making little notes in her own files and in the back of her mind that hey, this is a little unusual. The suspect, in this case, always had an explanation of why they were taking the funds. "Oh, I'm making a bank run. Oh, it was needed for XYZ purposes. The owner needed this." And so this individual would just catalog that.
At the onset of this investigation no one had mentioned to us anything about the cash. And there was definitely misappropriation through the bank accounts, and through credit card charges, and payroll, and various other manners but no one had mentioned ... It wasn't until we started having that conversation that all of a sudden cash became the forefront of the conversation and we really needed to start doing some procedures, some analytics around the cash. At the end of the day, the suspect in this case took three times the amount of cash than all the other misappropriation that had occurred. That was something very significant that we may not have uncovered had we not asked those type of questions.
Justin Burns:
I mean, wow, that's a significant amount to add onto the top of all of this.
Ben Kincaid:
Absolutely.
Justin Burns:
From one conversation you had with somebody and you're like "oh, they mean the" ... "You talking about the safe." You're like "Yeah, if that's what you're talking about, please tell me about it." That's a great example of why you interview clients and you ask some open-ended questions to get them talking. I love it whenever they can just go down a path that you didn't think you were going to end up at and you just end up finding a little bit extra.
Ben Kincaid:
For sure.
Justin Burns:
Ben, I think that's a great example. But we are going to take a quick break for some ads and then we'll be right back.
Speaker 4:
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Justin Burns:
All right, so we're back with Ben Kincaid. Ben, you've got a great fraud story about some purchasing card activity for a governmental entity. Can you tell us that story?
Ben Kincaid:
Sure. Purchasing cards within a government organization are [inaudible 00:18:01] ... Similarities to a business credit card for governments. We were called in to investigate a particular employee's usage of their procurement card or p-card usage. And there had been some concerns that had developed. And one of the threads that had brought this all to light was ... This particular individual worked for this government organization, they had access to a procurement card. And this individual was going and buying goods, merchandise from various stores whether it be Walmart, Target, Publix, whatever have you. And they would go into a pawn shop and essentially take those merchandise and essentially resell those for, obviously, a lower value. Some of this was TVs, some of it was PlayStations, some of it was Xboxes. Just a variety of things. Even though those seem unusual for a government organization to purchase, it was not unusual for that particular employee's position. That was something that was expected for them to purchase based off of the job duties.
And so this pawn shop owner became suspicious because this individual keeps dropping off unwrapped or ... Goods and merchandise, TVs, things that had never been opened. And so this pawn shop owner was like "Okay, well you need to start giving me receipts showing me that you didn't just steal this off of somebody's truck or a store or something." And so this individual started providing receipts to him and matched up. So the pawn shop owner cataloged it but kept on. As most pawn shop owners do, they have a relationship with local law enforcement agencies and they provide information over to law enforcement agencies.
For a particular deputy, they made one of the routine trips to this pawn shop location. And they started having conversations with the pawn shop owner and they started discussing, "This was a little bit unusual but hey, they had the receipt." So the sheriff's deputy, in this particular case, was like "Let me see that receipt." And so they started looking at the receipt. And one of the things that this sheriff's deputy noticed, and I thought was a very good catch, was there was no sales tax.
Justin Burns:
A great catch by the sheriff's deputy.
Ben Kincaid:
Absolutely. That's something that's unusual because for those type of goods, TVs, and other electronic merchandise you would expect that there'd be sales tax to be charged. The sheriff's deputy started suspecting that hey, maybe they use some type of government organizations funds because they have sales tax exemptions. And so the sheriff's deputy looked up this particular individual, found out that they work for this local government organization. And the sheriff's deputy went to the government organization and says, "Look, I think you guys got a problem." And that's what precipitated us being called into investigate that. And sure enough, they absolutely did have a problem. And this individual was able to take tens of thousands of dollars through this p-card program through a very short window of time.
Justin Burns:
Wait. So earlier you said that making purchases of TVs, and PlayStations, and things like that were not abnormal for this guy's position. That just got me curious, what was this guy's role?
Ben Kincaid:
Sure. It related to a community role. It was outward-facing and so those were definitely expected purchases. This individual, they took it a step further, in this particular case. The government organization was going through a system transition with their p-cards and so they went from an old system to a new system, and this new system provided extra data to this government organization. And some of this extra data was actually electronic receipt that was transmitted and put into their p-card system. The reviewers, the supervisors, the higher-ups, whatever have you would be looking at these, saw this extra data and started comparing it to the receipt submitted by this individual, and they started noticing differences. They're like "Okay, well, it shows TV here but over here it shows balloons, what's going on?" And so they asked the employee, "Hey, what's going on?" And he's like "Oh, I know what you're talking about. This organization that I purchases things from they have been having point-of-sale system issue. And so the receipt that you're getting, that's not right. My receipt is correct."
One of this particular organizations was Target. And so this individual provided them with this one-page letter from Target and saying that, "Hey, we're so sorry that we transmitted data to you but the original receipt you have is correct." And so the employees in this case, the supervisors and people that were reviewing and proving these transactions, just ... They thought it was a little unusual but they accepted him at his word, hey, this is a trustworthy employee. If you started really looking at the letter, that's not a letter that you would expect an organization like Target to produce, let alone have a problem like that. You look at the letter, they had this little Target logo but you could tell it was copied and pasted onto this letter. And essentially this employee fraudulently created this letter. What they were doing was they were manipulating the receipts that was being submitted to this organization, this government organization, and to hide some of what they were purchasing.
Justin Burns:
Yeah, if Target's having an issue like that, the first time you hear about it probably isn't going to be through a letter you're probably going to see it on the news or something.
Ben Kincaid:
Absolutely.
Justin Burns:
I don't think that's something you should just expect to come in the mail. That's a good way to talk about okay, well, there was this sort of opportunity and that was this guy's way of covering this up for a governmental entity. I mean, could the same thing happen in a small business?
Ben Kincaid:
Absolutely. That's one of the frequent things that we see and often is a precursor, if you will, to some of the larger frauds that we see is that these employees, or suspects, are kicking the tires and seeing what limits of the controls are. And so one of the easiest ways is through p-cards or through credit cards. There's no controls and the employees are not submitting receipts and so they're just purchasing whatever they want on the credit cards. Or, they're submitting receipts that have been altered to make it look like hey, this is a legitimate transaction related to the business operations, when in reality they alter the receipts to make it look that way and what they were actually buying was something entirely different.
Justin Burns:
If the person reviewing it has that trust with you where you're like "Oh, I can just explain this away, I'll be okay." I mean, but there's also massive opportunity when you know that there's not a reviewer there. A case that came to mind while you were talking ... I was like oh man. I had a case last summer that I worked where a managing partner at a law firm knew that nobody was reviewing his credit card purchases. One of the partners had me look into the firm's finances because he wasn't getting his profit sharing distributions. Sure enough, we've got divorce attorney for wife number one, we've got a $52,000 engagement ring for wife number two, we've got trips out of the country. This guy's living the high life all on the firm's credit card. And just over a seven-month period he had spent $350,000 on the firm credit card. It was a real good reason why everybody wasn't getting their profit sharing distributions.
Ben Kincaid:
I can imagine.
Justin Burns:
When you get the opportunities like that with maybe unsophisticated review or no review at all, that's just a massive opportunity for these purchasing card and credit card frauds.
Ben Kincaid:
Absolutely.
Justin Burns:
You have another story that we talked about about some fraudulent reimbursements for a maintenance person working at a healthcare practice.
Ben Kincaid:
This is another common aspect of what we see in investigations, whether these be small businesses or even multi-international corporations, is reimbursement frauds. Some of them are small-scale and unsophisticated, some of them are very sophisticated and can involve large dollar amounts. In one particular case we are investigating, this individual was in charge of a maintenance department for a large healthcare entity. Had access to a credit card for this business to buy the supplies to ... They had maintenance facilities all over. Facilities all over that they ... The maintenance team had to maintain on behalf of this large entity. There was purchases by this maintenance director for these maintenance supplies and things of that nature. But this individual was also submitting reimbursements for purchases that this individual had purportedly made out of pocket. Those were being routinely approved and paid. This maintenance director was supplying all, what appeared to be, the necessary documentation, receipts, invoices, things of that nature, and so everything was being approved. The only thing that really stood out was why is this maintenance director, who has access to a credit card, getting so much in volume of reimbursements.
And so one of the statements that was usually made is, "Oh, I'm just trying to get personal credit card rewards," things of that nature. That's somewhat common. But they just kept seeing this level of reimbursements and so they started asking us to look into this situation. And so what we started noticing right off the bat is some of this documentation that was being submitted for reimbursement were not full invoices these were just quotes. And so this maintenance director would go to whatever supplier and say, "Hey, give me a quote. For XY materials." And they would get that quote. And then they would submit that quote for reimbursement and not pay one red cent for that quote but they were getting the reimbursement for it.
Other times it was a legitimate receipt, but what was happening was the supplier was billing this particular entity on account. And so this employee did not pay it via their personal credit card, the company was paying it through their normal vendor, accounts payable system. There was that duplication essentially and this employee was receiving those reimbursements. This particular case, it amounted to well over a million dollars in reimbursements that this employee had fraudulently received. I believe it was around a three-year timeframe that this employee was doing this. And so it was a long time for this particular company not catching it. This employee was able to take a massive amount of money from this organization. Certainly not unusual. But, certainly, this case had a lot of money flowing out of this maintenance department because of this individual.
Justin Burns:
Was this the guy who was also purchasing items on Amazon, getting the order confirmation, submitting that, and then immediately canceling the order so it never actually went through?
Ben Kincaid:
Yep, absolutely. He would get a receipt from Amazon that would show his credit card number on there and he would order whatever supplies. As soon as that email was received he would go back into Amazon, cancel the order so his card was never charged, the goods and materials were never shipped to him, and he would submit that reimbursement right over to the accounts payable department for processing. Just another inventive way for him to cover up his tracks.
Justin Burns:
With your experiences with these cases that you've worked on, what's a recommendation that you make to small business owners?
Ben Kincaid:
Sure. As a small business owner, you may not be able to afford all the bells and whistles, if you will, of the internal controls. You may not be able to segregate all of the duties because your business just isn't big enough. It doesn't make financial economic sense to have all those controls in place. Routinely in the Association of Certified Fraud Examiners annual reports is that ... Internal tips is one of the largest flags and reporting mechanisms of fraud within business. As we were talking earlier in our conversation about is there's often red flags that are seen by either the owner or the employees they just don't recognize them as red flags and so they might see them, they might file them away in the back of their mind. But if they had some awareness of what these red flags might be, some training in that regard, it would be very helpful.
And so that's something that we frequently recommend is fraud awareness training, whether it's just attending a fraud training course. Oftentimes law enforcement or county organizations will put on these type of awareness seminars at Chamber of Commerce or other public-facing events. And go to those events and learn and apply those red flags to your business. Review your bank statements, review your credit card statements. Just the perception that you're looking at things will certainly cause a potential individual from stealing from you a pause before committing that because they think that you're looking at those even if you're not really.
Justin Burns:
Going back to, like we said earlier, in hindsight did you notice something weird? If they have that fraud awareness training where they can recognize those things ... Now when they see it and they are thinking, in the back of their head, that's a little weird but maybe I won't say anything, now they have the awareness and understanding to say something at that point. And that's when you can stop the fraud and stop the money from continuing to add up instead of months or years into the future where the losses have started to really pile up.
Ben Kincaid:
Right.
Justin Burns:
So in doing an annual training is really not that expensive for your employees. Like you said, just having them attend a presentation from the sheriff's Department or something like that it's-
Ben Kincaid:
Absolutely. The old adage, trust but verify is certainly applicable here. And certainly, trust your employees. You have to put trust in them to conduct business operations. Verify that trust and look at those things. Educate yourself to some of these red flags that may exist.
Justin Burns:
Absolutely. Ben, I've had a great time on our call today.
Ben Kincaid:
Likewise.
Justin Burns:
If people want to get in touch with Ben Kincaid, how do they do it?
Ben Kincaid:
The best way is just shoot me an email.
Justin Burns:
All right. And we will have your email, your LinkedIn, all of that in the show notes for this program so people will know exactly where to go to get in touch with you. Thank you so much for joining me today.
Ben Kincaid:
Absolutely. Thank you for having me.
Leah Wietholter:
Thank you for listening to the Data Sleuth Podcast. If you enjoyed this episode please leave us a review wherever you listen. The Data Sleuth Podcast is a production of Workman Forensics. To learn more about our investigation services and resources please visit Workmanforensics.com.