Connecticut: WITH TWO CASINOS IN THE AREA LOCAL EMPLOYERS URGED TO REMAIN VIGILANT

WITH TWO CASINOS IN THE AREA LOCAL EMPLOYERS URGED TO REMAIN VIGILANT
By Karen Florin
Publication: The Day
Published 06/10/2010

Accounting professors produce 'cautionary tale'
Embezzlement by trusted and respected employees, most of them with no prior criminal records, has become all too common since two of the world's largest casinos opened in southeastern Connecticut.

The latest area business to fall victim to a gambling-addicted employee is Chartwells Dining Services, which lost more than $335,000 when the director of dining services for East Lyme schools created false deposit logs to hide the daily theft of funds from school kitchens over a three-year period.

Before that, town halls, car dealerships, law firms, fitness clubs and even the U.S. Coast Guard were among those who incurred enormous losses.

Most of the organizations were taken by surprise and did not immediately discover they had been defrauded.

Patrick T. Kelly, a Ledyard resident and professor who chairs the accounting department at Providence College, has created a spreadsheet to track gambling-related embezzlement cases in Connecticut. He reproduced part of the list for a paper he co-authored with his colleague, Carol Hartley, called 'Casino gambling and workplace fraud: a cautionary tale for managers.'

'I have continued to add names to it,' Kelly said in a recent phone interview. 'It's really unfortunate.'

Kelly has documented about $7.2 million in losses since 1998 but says the list may not include every case. The bottom line for Kelly and Hartley is that businesses need to strengthen their internal controls and educate their employees so that they do not become victims.

'If you're in a casino region and you've got a business with cash coming into it, you'd better be on top of it,' Kelly said.

On Friday, Kelly and Hartley will join forces with problem-gambling counselors at United Community and Family Services in Norwich in a workshop designed to help companies protect themselves from such thefts.

Kelly and Hartley tracked many of the embezzlement cases that were heard in New London Superior Court and spoke with prosecutor Lawrence J. Tytla, who has handled the majority of them. Tytla told them that prior to the casinos' arrival, most of the larcenies he prosecuted involved cocaine addiction. Now he estimates that 95 percent of the major larceny cases are casino-related.

In their research paper, which was published recently in the Management Research Review, the authors described several of the local cases, though they omitted names, and provided insight on what drives gambling-addicted employees to commit fraud. They wrote of a 'fraud triangle' whose three sides comprise opportunity, pressure and rationalization. The opportunity to embezzle presents itself to trusted employees, particularly of small organizations that do not separate cash-handling functions from record-keeping functions.

The pressure leg of the triangle has to do with the proximity of the casinos, 'which might entice personalities with a susceptibility to a gambling addiction.' Those who live within 50 miles of a casino are more likely to become problem or pathological gamblers.

Rationalization comes into play because the employee perceives his or her financial problem to be temporary and 'borrows' money from the employer with the intention of paying it back when their luck turns. But because the odds favor the casino, the initial temporary problem becomes insurmountable.

None of the embezzlement schemes are complicated, according to Kelly. The most common methods include check tampering, skimming revenues by stealing cash before it is recorded and processing fraudulent invoices by causing an organization to pay for fictitious, inflated or personal invoices.

Kelly and Hartley found that managers often rely too much on external auditors, who frequently do not catch the embezzlements. They recommend that companies create an internal audit department, if they can afford it, or encourage their external auditors to conduct surprise audits.

Other recommendations include segregating duties so that no one person has control of both incoming cash and record-keeping; careful review of bank statements by high-level managers; securing blank checks under lock and key and then having the signer send them directly to the vendor; and careful control of incoming receipts.

The professors also recommend that employers 'develop enhanced, focused awareness of employees' habits and circumstances' to avoid being defrauded. They suggest being aware of employees' conversations with one another about trips to casinos or other gambling venues; employees treating everyone to lunch; furtive phone calls or absences from the office; staying late before period end reports or customer statement generation; preoccupation or worry over auditor/accountant visits; credit card debt or financial pressure due to medical bills and substance abuse issues relating to alcoholism or drug use.