Corrections or additions?
These articles by Kathleen McGinn Spring were prepared for the
September 5, 2001 edition of U.S. Newspaper. All rights reserved.
Monitor Employees, Including Top Dogs
Alan Stedman, director of the Family Business
Resource Center at Rutgers, pauses, searching for a word to describe
how it felt when a group of employees in his own family-owned business
conspired to defraud him. "Devastated," he says.
You think you take pretty good care of people, treat them well. You
get to the point where you don’t trust anyone."
Having to constantly "look over his shoulder" to protect his
business from employee theft was one of the reasons Stedman packed
it in, and accepted the challenge of starting up the three-year-old
Family Business Resource Center (E-mail:
firstname.lastname@example.org). "You get worn down," he says.
Stedman, who holds an undergraduate degree from Washington and Lee
(Class of 1969) and an MBA from Dartmouth, was defrauded by hourly
workers in his retail beverage business, something he says is so
that it is "a cost of doing business," particularly where
there are cash registers or an inventory of easily-saleable products.
But, he says, theft by hourly workers is typically not the most
type of employee fraud. It is schemes by the very top employees that
can bring a business down.
Stedman has spoken with owners of small businesses that were destroyed
because "key employees were not monitored." As a rule, he
says, the more an employee is trusted, the more likely it is that
employee will be the one to embezzle or otherwise defraud his
"People won’t be looking their way," he says. "The
and focus of control is on the lower level employees."
That appears to have been the case with Joseph Semrod, chairman
of Fleet New Jersey, and the former longtime CEO and chairman of
Bancorp. He trusted his secretary, Darlene Gentry, with access to
his personal checking account. In a suit filed in Superior Court in
Mercer County, he is accusing her of stealing $1 million from him
over 18 months and an unknown amount over a period of six years.
had given Gentry limited power of attorney, enabling her to sign
drawn on his account and to pay his bills.
In another high-profile local case, Jeanne Gaston, then a Hopewell
Township resident, was convicted of siphoning more than $3 million
from the checking account of securities executive Vincent Murphy.
Gaston had been Murphy’s secretary for 15 years, first at Salomon
Brothers, and then at Merrill Lynch in Plainsboro. After he retired,
Murphy retained Gaston as his private secretary, leaving blank checks
for her to use in paying his bills.
In a pending civil suit, Murphy and his wife are alleging that Joseph
Scandariato, a Merrill Lynch financial advisor, is also culpable.
Both Gaston and the Murphys were Scandariato’s clients, and he is
accused of failing to detect and disclose the theft.
In yet another instance of fraud by a trusted individual, the
of the South Brunswick Upper Elementary School PTO, Delores Harbison,
has been charged with diverting $26,000 from that organization by
writing checks to herself.
Cases like this illustrate the importance of establishing — and
constantly assessing and upgrading — monitoring procedures.
says that at the time the theft against his family’s business occurred
he thought he did have controls in place. He found, however, that
they were not enough to stop a number of employees in two of his
locations from exchanging information and "carting off
Small businesses typically have little in the way of structure and
control, Stedman says. Everyone is expected to know his job, and to
just do it, often with little supervision. As businesses grow,
are put in place, but, he says, "administrative structures rarely
catch up with the growth." Generally, it is only in the mature
organization, Stedman says, that "everything is tied down and
codified." In small, or young companies, "there are too many
other things to think about." The cost for neglecting auditing
controls, however, can be the very existence of a small business.
And even in mature organizations, assessing auditing procedures needs
to be a constant, ongoing concern.
When Frank Gatti took over as CFO of Educational
Testing Service three years ago, upgrading that organization’s
audit function was a top priority. Toward that goal, ETS will begin
what Gatti terms "a rigorous three-year audit plan," beginning
in the fall. "It’s not because we have had fraud," he is quick
to stress. "It’s something most organizations should do to make
sure administrative and accounting practices are the best
Gatti, a Baruch College graduate (Class of 1967) who earned his MBA
at Rutgers, was recruited from the New York Times Company, where he
was vice president for financial management. In addition to arranging
for the three-year audit, he has hired additional internal audit
for his organization, where revenues are about $600 million a year.
ETS must safeguard its money, of course, but perhaps even more
it must safeguard the information customers around the globe entrust
to it. "We collect Social Security numbers, names, credit card
numbers," Gatti says. "We have to make sure individuals can’t
break in." And ETS also has to make sure no employee can use the
information for illegal purposes.
"We’re a deceptively complex business," Gatti says. "There
is a high degree of technology embedded in the design and delivery
of our products." With technology, he says, "there are always
new challenges. Once one starts to migrate toward more electronic
transactions — and the Internet — one needs controls that
are contemporary, and not outdated, left over from the age of the
pen and paper."
Internal controls not long ago centered around cash and checks.
money in those tangible forms safe is tricky, but it is child’s play
compared with keeping tabs on money in an increasingly electronic
age, where, says Gatti, "Signing over checks is outdated."
At ETS, for example, employees receive notification that their
have been deposited into their checking accounts by going online.
Soon, Gatti says, expense accounts will be filed online too. And
will not even have to do a lot of typing. Charges on a business credit
card will be automatically uploaded right onto their expense account
In a much more complex migration, ETS is implementing PeopleSoft for
its business processes. The new system will direct orders and payments
to vendors, handle human resources functions, and more. The
added auditing procedures as the new software took on more chores.
"We had to create the correct stratification for
says Gatti. Up to a certain dollar amount, transactions might require
two signatures, but as the dollar amount rises, so do the layers of
Gatti knows that this monitoring system, no matter how sophisticated,
will never be the last word. Every company must constantly reevaluate
its internal audit systems, and, he says, it is vital that the
is set at the top." This is so, in good measure, because when
it comes to fraud by employees, Gatti says, "where there’s a will,
there’s a way." Hoping to avoid a costly lesson of his own, Gatti
says, "You have to stay a step or two ahead."
— Kathleen McGinn Spring
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