Spot Red Flags Before You Get Scammed 

Losing $200,000 to employee fraud was devastating. It taught me to find red flags. From my ordeal, I hope you will be alert to spot the warnings I missed so you can avoid similar scams, including personal ones. 

I inherited Betty, the bookkeeper for our small construction company, from the previous owner. Betty was an outstanding employee. She went above and beyond, worked long hours, wouldn’t take time off, and produced reports before being asked. I just gave you two red flags. 

The IRS Notice 

Betty sorted and delivered the daily mail. One day, six months after I purchased the company, her car broke down. She couldn’t be at work to receive the mail. In that day’s mail was a final notice from the IRS indicating the company had failed to pay federal taxes withheld from employees’ paychecks. 

My heart raced. My palms sweated. I was in panic mode, trying to grasp the severity of the situation. I searched Betty’s desk for clues and discovered three previous IRS notices she had hidden.  

I contacted her by phone, and she claimed not to know about the missing payments and only remembered she had mailed the checks. 

Bookkeeper Running Out Door to Hide an IRS Notice 

Betty never returned. 

After several lengthy conversations with the IRS, I came to the harsh realization that Betty had changed the names on the checks to cash them in her name. When the bank returned the canceled checks, she removed the checks in question to hide her embezzlement before storing the remaining checks and bank statements in archive boxes. 

The Battle to Right A Wrong 

I sought legal counsel. Having inherited Betty as an employee, I informed the previous owner about the situation, but he denied involvement. He had been a trusted person for over twenty years. 

I later realized another mistake. I should have had the accounting firm conduct a full audit of the closing balance sheet and income statement. Instead, because of the owner’s past trustworthiness, I opted for the less expensive option of a review the financials.  

A full audit, after the fact, was completed. The audit revealed that federal tax withholding liabilities had gone unnoticed. On the balance sheet, it appeared the taxes had been paid. 

The legal battle persisted for two more years, and the legal fees surpassed any possible settlement amount. Sometimes it’s better to cut your losses and move forward. It was not going to bring back what was lost. I settled the case with my lawyer and negotiated a payment plan with the IRS. 

One year following Betty’s departure, a local contractor called, revealing that Betty had committed fraud by embezzling the IRS tax withheld from his workers. He had doubts about being deceived since, in retrospect, he recalled Betty advising him against contacting her former employer. 

Painful And Valuable Lessons 

The experience taught me a painful lesson in the importance of understanding financial statements and being proactive in managing the company’s finances and employees.  

Promote accountability by “inspecting what you expect” while respecting boundaries, communicating clearly, and providing support. 

1. “Inspect what you Expect” is a valuable management principle. I thought I was using this principle by reviewing the monthly bank reconciliations prepared by Betty. Duh! I should have taken additional measures, such as reviewing canceled checks. Spot reviews are now more convenient with check copies printed on bank statements or online. I also would have conducted a comprehensive audit before acquiring a business to ensure I understood its financial situation thoroughly. 

2. Refusal to take time off. These people may fear their fraudulent activities will be discovered when they are away. 

3. Unwillingness to share job responsibilities or let others review their work. These people may fear someone else will discover their actions and report them to management.  

4. Living beyond their means. When someone appears to live beyond their means, such as driving a luxury car or wearing expensive clothing, it could be a potential red flag. It can be challenging to decide because you may not know the person’s other sources of income. But when you combine it with other potential red flags, it can point to fraud. 

Beware of Personal Scams 

Frauds and scams adapt like chameleons. While this story is about an employee scam, it is a stark reminder of the common tactics and red flags for all types of scams. Have you heard of these?  

Oops, Wrong Number, an urgent message that appears to be for someone else. You text back and get involved in friendly texts until you are scammed to give your credit card information.  

Fake Barcodes on Gift Cards. You buy a card with a sticker affixed over the actual barcode. When the cashier scans the barcode at checkout, it directs your money into the scammer’s gift card account.  

Other scams include investment, online dating, fake high school sports streaming sites, bank and IRS impersonators calling and emailing, and charity. 

It’s never too late to equip yourself with protective measures to safeguard against scams. Use the “Inspect what you Expect” principle whenever possible to guide you in all areas of your life. Do the proper research. Be alert. Then trust your instincts.