An ebony-framed pen-and-ink sketch of the Cincinnati skyline hangs in the spacious office of Susan Morin, second-generation owner of Gorman Supply Inc., a Cincinnati firm that supplies equipment and advertising specialties to the food and beverage industry. The eye-catching artwork serves to remind Morin of an ordeal that nearly destroyed her business. It was a gift, Morin says, from Tami Jordan, a former employee who in 2000 was convicted of felony theft charges and sentenced to prison for embezzling more than $300,000 from Gorman Supply. Morin says she later discovered that Jordan had purchased the drawing with the stolen money. Why does she keep the piece? “Because I paid for it,” she asserts.

Jordan, now in her mid-30s, served 2 1/2 years at the Ohio Reformatory for Women and after her release lived at Talbert House, a Cincinnati halfway house for ex-offenders and recovering addicts. Although Gorman Supply's attorney in 2000 obtained a $308,765 civil court judgment against Jordan and her husband—who was also convicted in the case—Morin says that as of 2004, she had received only about $1,000 in restitution.

“It damn near killed the business, about sent me into bankruptcy,” says Morin angrily. “If it wasn't for my longtime vendors who trust me and know me, then it would be over.”

Unfortunately, cases like Morin's are common. “Family-owned businesses are more vulnerable to embezzlement,” says Detective Steve Beck, a white-collar-crime investigator with the West Chester Township Police in Ohio, the department that handled Morin's case. In family firms, says Beck, “management wants to create a family environment, so they're more trusting.”

The 2004 “Report to the Nation on Occupational Fraud and Abuse,” a study of 508 cases conducted by the Association of Certified Fraud Examiners—a professional association based in Austin, Texas, with more than 100 chapters worldwide—indicates privately held companies are at greater risk of fraud. According to the report, the median loss experienced by small businesses in the study was $98,000—higher than the median loss experienced by all but the very largest organizations. “Small businesses are less likely to be able to survive such losses and should better protect themselves from fraud,” the report says.

Among the victim organizations examined in the study, the median recovery was only 20% of the original loss. Almost 40% of the defrauded organizations recovered nothing at all. “The most cost-effective way to deal with fraud is to prevent it,” the report notes. Unfortunately, Morin and her family learned this lesson too late.

Morin's father started Gorman Supply Inc. in a spare bedroom in 1972, after being laid off at age 56 from his job as operations manager for a major soft-drink bottler. At the urging of his wife, he started the company with no money down. “He knew a lot about the industry,” Morin says, “so he went to companies in Ohio, Kentucky and Indiana to find manufacturers for products he could sell—many of whom remain vendors even today.” He started out by selling coolers, waste receptacles, dispensers and other equipment. Business in the early years came from people with whom he'd established relationships at his former position. His customer base grew quickly. Within two years, the business had outgrown the extra bedroom.

When he retired in 1989 at age 74, Morin's father passed the reins to Susan and her sister Mary-Jane. They worked as partners until 1996, when Mary-Jane decided to sell her portion of the business to pursue other things. It was during this time that Tami Jordan was hired as a bookkeeper. But, Morin notes, her voice rising a few octaves, “We paid a national accounting temp service thousands of dollars to get an employee, and background checks are not included in their fees.”

The family selected Jordan because she had bookkeeping experience and was friendly and personable, Morin says. She adds that she considered the bookkeeper a close friend. “I had been invited to her mother's birthday party,” Morin recalls, “and she had attended parties at my home.”

When Jordan was hired, the company was experiencing steady growth with about $1 million in annual sales. The five full-time employees received benefits like profit sharing, a retirement package and generous medical insurance, an unusually comprehensive package for a business the size of Gorman Supply.

In late 1997, Morin says, she noticed a drop in cash flow but thought it was due to the recent loss of a major account. She also remembers noticing several details that investigators say are often warning signs of business fraud. Jordan, who paid the company bills and managed the books, began to work long hours. She was meticulous with her bookkeeping and pointed out a few vendor billing errors. But she guarded the books from anyone else's view, Morin recalls.

Meanwhile, Jordan was purchasing a luxury SUV, jewelry and vacations, according to court records. Although Morin thought it was unusual at the time, she did not connect her lack of cash flow to Jordan's lavish new lifestyle, she says.

When the cash flow problem did not improve although sales had risen, Morin says, she knew something was wrong. “I thought, I can't work any harder; what's going on?” she recalls. “I had two CPAs called in to find out what was going on. I was losing money, and that had never happened.”

The investigation revealed that Jordan had been writing checks to her relatives and creatively managing the books to hide the fraud, Morin says. Jordan had also managed to cash a cashier's check from the company bank account although she wasn't a cosigner, according to Morin.

By the time the police got involved with the investigation, the company Morin's parents had worked so hard to build was on the verge of bankruptcy. Morin says she had to lay off five full-time employees as a result of her financial losses due to the embezzlement. Morin remembers feeling shocked and devastated. “I just never thought [Jordan] would do that,” Morin says. “I thought of her as family.”

Five years after her business nearly went belly-up, Morin is proud to have weathered the storm, although she acknowledges that even now, “every day is a struggle.” Hard work and strategic planning have allowed her to put the business back in the black; she has increased sales and landed several major new contracts. At the moment, the only employees are Morin herself and her daughter Carolyn, 26. When she's ready to hire again, Morin says, she plans to take measures to prevent fraud.

Ron Evans, a CPA with John F. Dickey & Co. in Fairfield, Ohio, explains that there are generally two types of embezzlers. “One is professional; the other is someone who has pressure from a need like gambling, drinking, drugs or income loss, and they need cash quickly,” says Evans, who has pursued several embezzlement cases in small businesses. “Most of the time when fraud starts, it's someone who's short of cash at a particular time and they intend to pay it back—and sometimes they do. They then notice that no one missed the money, and that's why they do it again.”

Embezzlers often engage in “lapping,” or juggling the books to cover up fraud, Evans says. Eventually the fraud gets written off as bad debt. That's when accounts receivable start creeping over 45 days, Evans points out. He urges owners to review their adjusted journal entries. If someone is stealing cash, he notes, the person will make a journal adjustment to cover it up.

Evans also recommends that business owners be on the lookout for fake companies. “It's easy for a thief to create a company using basic software,” he notes. “They then send out invoices, which can easily get paid if you don't pay close attention to your accounts. If you're sending checks to a P.O. box address, call to make sure it's connected to a real company.”

He advises against the use of company credit cards, which can be abused. “Have employees use their own card and submit a detailed receipt for reimbursement,” Evans suggests. “If you must have cards, don't let the person using the cards receive the billing statement, and verify every item and amount that appears on the card statement.”

What if you suspect that a family member is committing fraud? Evans recommends engaging a forensic accountant, “who can dig in and find the problem.” It's best to have concrete evidence before confronting the relative, “if you want to keep peace in the family,” Evans says.

Evans says the best advice for business owners is to purchase bond insurance, which will provide reimbursement for an amount stolen from the business. “It's reasonably priced,” he says, “but most small businesses don't bother because they feel it's not necessary.”

In the privately held companies examined in the Association of Certified Fraud Examiners study, more than one-third of the fraud cases were detected accidentally. According to the report, this finding suggests that “private organizations are missing an opportunity to reduce costs by proactively seeking out occupational fraud.”

Experts say a business owner's best route to recovering money from an embezzler is to hire a private detective who can uncover hidden assets the thief might have, and then to sue the person in civil court. But like many legal battles, that can be a long and tedious process—“and if the person decides to file bankruptcy you'll likely be stuck with a lot of legal fees,” says Evans.

Although Jordan was convicted in criminal court, Morin says she has spent more than $12,000 on private detective and attorney fees to build a civil case—but it's unlikely she'll recover her money. “I think it's outrageous that you can have a judgment against someone and they don't have to pay,” she says.

Morin says that despite the nightmare she endured, she remains “a trusting, giving person,” although she adds, “I'm more conscious of things than I was before.” She serves on the board of her local Chamber of Commerce and says she helps other small businesses grow by steering work to them whenever possible.

“The people who stole from me are not going to win,” Morin says. “Am I going to continue with this business? Do I love it? Yes, of course I do.”

Angela Black is a freelance writer based in Cincinnati.

Ten fraud prevention tips Detective Steve Beck, a white-collar-crime investigator with Ohio's West Chester Township Police, and Ron Evans, a CPA with John F. Dickey & Co. in Fairfield, Ohio, suggest the following measures to protect yourself from falling victim to an embezzlement scheme:

1. Check your business credit report annually to make sure no unauthorized person has taken out a credit card in your company's name.

2. Establish a personal relationship with your banker and make sure you understand the bank's procedures for handling your money. Be aware of the bank's process and regulations for handling your business account. Ask questions.

3. Require two signatures on checks exceeding a predetermined amount.

4. Ensure that your business bank statement is sent to your home or to the company accountant before it's passed along to the bookkeeper.

5. Keep good records of check numbers, and always reconcile your checking account immediately. Find out how your checks will be processed under the new “Check 21” law. It's good to be able to view digital check copies online, but it's preferable to actually see the checks, even if you have to specially request them from your bank. The bank may charge a fee, but it's worth it.

6. Purchase bonding insurance and have background checks performed on any of your employees who handle funds.

7. Use a payroll service, which can help prevent theft of payroll tax funds. By the time such a theft is discovered, you're likely to be in trouble with the IRS for non-payment of taxes.

8. Review your journal entries monthly and go over any adjustments with the person who made them.

9. Call all new vendors, introduce yourself and get to know them. This not only is a mark of a good business relationship but also will enable you to immediately identify a fake business.

10. Pay attention to an increase in bad debt or aging accounts receivable. If customers who always pay on time or early suddenly stop, find out why.

—A.B.