Kathryn Cunningham, founder and operator of Moresource, Inc., a Missouri company which calculates and disburses payroll and income taxes for clients, was sentenced for wire fraud and failure to collect or pay taxes.
According to the plea agreement, Cunningham's company collected funds from its clients for payroll and related expenses and also generated tax forms. The funds were all deposited into a specific account, which by design should never have a shortage because money was collected from clients before it was due.
However, in January 2020, the company owed approximately $1.37 million in payroll taxes on its clients' behalf, yet the account contained less than $400,000.
An investigation revealed that Cunningham had stolen funds from the account for personal expenses and resorted to borrowing money from at least two lenders to cover what she took. Cunningham paid for those loans via funds from the client account. She also stopped filing timely accurate IRS Forms 941 and did not make regular payments to the IRS for employment taxes owed by her clients.
To conceal her scheme and cover account shortages, Cunningham contacted clients requesting early payments for their payroll deposits. She excused these calls by claiming a different client caused a shortage due to that client's cash flow issues.
Source: https://www.justice.gov/usao-wdmo/pr/columbia-business-owner-sentenced-fraud-scheme
Commentary
Reports indicate that 85 percent of embezzlement cases are perpetrated by managers or those in higher authority positions. In addition, nearly 70 percent of embezzlement cases involved employees in finance, bookkeeping, or accounting roles.
https://www.hiscox.com/articles/hiscox-study-reveals-79-percent-embezzlement-schemes-involve-two-or-more-people; https://www.incorp.com/resources/knowledge-base/biztips/employee-theft-and-fraud-part1
However, the risks of embezzlement or fraud by outside vendors that have access to your funds is also real.
Trusted third-parties such as outside accountants, payroll processors, escrow agents, or other intermediary financial agencies may have access to organizational funds, which allow for opportunities for employees at those businesses to commit embezzlement schemes.
Organizations that fail to recognize this reality can face significant financial risks when a third party they've trusted with their money absconds with it without performing their services.
Recognizing the red flags that funds are not being utilized by the third party properly is key. Schemes involving diverting funds from an account with pooled client money often rely on new money to cover shortages. Red flags would include requests to make payments sooner than expected, like in the case above.
Organizations may have multiple opportunities to spot this red flag because it may emerge as a pattern when the perpetrator requires more money to fill gaps long enough to make a next required payment.
Accompanying statements regarding the cash flow issues of another client are also a red flag like when properly managed, pooled fund accounts should not reduce funds for clients who pay on time when others are late.
These types of excuses combined with shifting explanations, sudden changes in payment timing, or reluctance to share an accounting of funds should be treated as warning signs of embezzlement that require immediate investigation.
The final takeaway is don't assume embezzlement risk only occurs in-house. Any outside vendor responsible for managing your money creates a risk, as well.
