Anatomy of a fraud: Uncovering the details of massive fraud took time and patience
January 1, 2013, 3:04 am
There were years of suspicion, frustration, and close looks through the books before Gregor Gmerek was charged on Dec. 14 with defrauding his former employer, Prairie Livestock, of more than $700,000.
Gmerek is alleged to have been forging and cashing company cheques over several years, and has been charged with numerous counts of uttering a forged document, forgery, and fraud over $5,000.
Kirk Sinclair, owner of Prairie Livestock, says investigation has continued since the charges were laid and feels by the time the final audit is complete the fraudulent entries will add up to more than $1 million.
Sinclair says he was suspicious of his former employee, but it took a long time to figure out exactly what was going wrong with Prairie Livestock's books.
"I have stacks of paper on my table, and some of them have been there for two years-looking through them, trying to figure out where the money was going," he said. "I knew something was wrong, but I just couldn't figure it out."
He said Gmerek perpetrated the fraud by writing cheques to himself, then voiding those cheques on the accounting system and entering legitimate-looking payments into the system-for example payments to farmers for cattle.
Gmerek would then intercept bank statements with images of the actual cheques written to him, Sinclair said.
Sinclair said it was frustrating knowing that something didn't add up but not being able to nail it down.
"For the last three years I knew something was wrong but I didn't know what it was," he says. "I was trying to catch him. We have our books audited every year, and I had the auditors go through the books closer for two years, but they couldn't find anything.
"Since the charges have been laid we found he was moving figures from the balance sheet to the income statement to hide it every time he printed out income statements, then moving it back.
"We finally found it through an entry in an accounts payable account that was sitting on the books for a long time. It was only one account, but it had two years of data in it."
The last entry in Prairie's books that Sinclair believes is fraudulent was Gmerek moving $1.146 million from the balance sheet to the income statement to cover up missing funds.
How does Sinclair feel about being defrauded by an employee in a position of trust?
"I definitely feel angry because he was given the ultimate position of trust in my company and he obviously 100 per cent disregarded any kind of ethical concern for my business," Sinclair said Friday.
"If this had happened when I was just starting in business I could be bankrupt over it.
"The worst feeling is, he was new to the area so I would take him and his son quadding, or have his family over for supper.
"To think that the whole time while you're doing that for him, he's working on bankrupting you by stealing everything he can-it's a pretty big slap in the face."
Sinclair said he is hopeful justice will be done in this case.
"I have no doubt that the criminal proceedings will find him guilty and we hope to have some success civilly as well," Sinclair said.
RCMP need hard evidence
Cpl. Andrew Dolman of the Moosomin RCMP says it's important to get hard evidence of a theft before charges can be laid. "In general, if someone came to us to say he thought an employee was stealing, we could suggest video surveillance. We have had cameras installed to catch employees stealing from a till, for example. We will conduct interviews with all the employees to determine if someone was involved.
"If it is more complicated or intricate like Prairie Livestock, the boss did an internal audit to discover what was happening. He came to us with proof as well, not just suspicions."
Dolman said it is important for businesses to have the proper procedures in place. "Many people are demanding criminal record checks to hire someone, but that only shows if they have been caught before," he says.
"If there are gaps in the system, then the guilty will exploit them for gain. Employers should make sure they have good security/money handling procedures and paper trails to limit the opportunities for employees to steal."
He said that charging an employee with theft rather than just firing them sends a message. "If someone does steal, make an example of them and follow through. This is a good deterrent," he said.
"We treat this as simply a theft/fraud from the employer and if there is evidence to lay a charge, the suspect gets charged."
Owners must maintain control
Elizabeth Nguyen is an expert on employee fraud with Meyers Norris Penny in Regina.
She says business owners should pay close attention to any red flags, as an employee who defrauds his employer usually does so on an ongoing basis and the losses can add up.
"The average amount of loss is $100,000, but usually when people detect a fraud it is one transaction discovered by accident, or through a tip. It might be a $300 accounting discrepancy or a missing cheque, and that is usually just the tip of the iceberg. Usually the fraud is 7 to 10 times that initial discovery."
She said an employee who commits fraud will usually start small. "They will try something small first, and if management doesn't detect it, they'll try something bigger. It's usually ongoing, because there's some sort of hidden need-whether a gambling addiction, a drug addiction or a financial need-and that need is usually ongoing."
She said an employee suspected of fraud should be removed from his or her position but not fired.
"We suggest if you suspect an employee, it's best to have that person removed from the organization-send them off on a course or on vacation, use that time when they're away to look deeper into the documents, or suspend them. If an employee is suspended, they're still an employee, and obligated to come in to be questioned, or to assist with the investigation. Don't terminate the employee right away."
She said forensic accounting can almost always uncover fraud. "If you have a suspicion and you've looked into it, it's usually best to call in a forensic accountant. Forensic accounting can uncover anything. We find it difficult if there's collusion by a couple of people in an organization, but we've never had one that we haven't figured out. We usually uncover what's going on."
She said owners should never cede too much control to an employee. "It's important to remember that, as an owner of a business you have full right to review anything you want. Owners are sometimes afraid of confrontation, afraid to ask questions, but you have full right to ask them anything and look through anything.
"The best thing an owner can do is not to relinquish management oversight. Sometimes someone will hire an accountant, a trusted person, and leave it all for them to control. As an owner, you have to take the time, review the goings on. Have the company's bank statement mailed directly to your house, review the scans of cheques, and ask yourself with each one, does it make sense? Does that look like my signature?
"We see a lot of fraud related to personal use of company credit cards. Have those statements mailed directly to your house. If employees know you're looking at it, the chances of fraud are a lot lower.
"Another important thing is to do spot checks on the bank deposit, do your own bank deposit now and then, and take it down yourself."
She said cheques are involved in most cases of fraud. "The main thing we see in business is cheque fraud, whether that's a forged signature, or writing a cheque to themselves. We see owners pre-sign cheques, which opens the door to fraud. Personal use of company credit cards is also a big issue because, for the employee, it satisfies an immediate need, and they know that statement won't be reviewed for another month, if at all. Another common thing is straight theft from cash deposits or theft when a customer pays cash."
She said many insurance policies cover the cost of a forensic audit. "The biggest tip we like to give owners is to look at their insurance policies. There are insurance policies that cover you for employee misconduct, which covers not only the loss but the professional fees associated with investigating the loss."
Suspicions from former employer
Prior to working for Prairie Livestock, Gregor Gmerek was Chief Financial Officer of FarmPure Seeds Inc.
On September 4, 2008, FarmPure Seeds Inc. filed a Notice of Intention to File a Proposal for bankruptcy. FarmPure operated a forage and grass seed processing plant in Nipawin that includes packaging and shipping to destinations around the world.
FarmPure had also operated a canola processing and treating plant in Laurier, Manitoba and a retail distribution centre for forage, grass and canola seed in Brandon, Manitoba.
Al Bridgen of Kisbey was a member of the board of FarmPure. He called the World-Spectator after he read about Gmerek being charged with fraud.
He said FarmPure directors had some suspicions about Gmerek and ended up locking him out of his office.
Those suspicions were not taken to police at the time, but Bridgen says he thinks the case deserves a second look now that Gmerek has been charged with defrauding Prairie Livestock.
He said the company had been profitable before it ended up going into bankruptcy with a deficiency of more than $8 million.
According to the bankruptcy trustee in the FarmPure Seeds case, "it is apparent the board relied on their Chief Financial Officer (Gmerek) and other staff to operate an expanding corporation and it appears insufficient controls were in place to recognize financial difficulty in a timely fashion."
The trustee noted some strange intercompany transfers. "The corporation had provided significant intercompany advances to the parent corporation for investment in affiliated companies, which were in the development stage. As of the last financial statement it was also identified that the corporation needed additional financing or recovery of intercompany loans in order to meet its financial obligations."
At one point FarmPure had around 100 employees.
Gmerek will be in court in Moosomin in February to face the charges against him.
In his own words: Kirk Sinclair describes uncovering the details of a fraud
Prairie Livestock Joint Venture is a cattle order buying business that has operated in Saskatchewan for the past 30 years.
We maintain a long term inventory consisting of a 1,000 cow-calf operation as well as several hundred stocker cattle mostly for suppling some of our long term customers in low supply periods in the form of contracts and short-term finance. For this reason our long term inventories are usually $2 million to $4 million.
Our company consistently handles approximately 200,000 cattle per year in the order buying business supplying both large and small clients and long-term customers who have finishing feedlots and backgrounder feedlots.
Our annual gross sales are $140 million to $160 million. This requires us to margin a large line of credit with the bank of $10 million, as there is several million dollars per week going through our bank account for three-quarters of the year.
This business has a gross margin of less than one per cent-about 0.66 per cent with the current average stocker price. Our payroll is over $1 million per year as well as all other overhead expenses that increase with inflation.
In 2008 Prairie's controller Dion Huel left our company to further his education in accounting and international business.
We were sorry to see Mr. Huel leave and were left with placing an advertisement for a competent and honest employee to fill Mr. Dion's position.
Gregor Gmerek applied for the GM and head controller position at Prairie Livestock in the summer of 2008.
Mr. Gmerek had a very good resume with a sound education and was qualified for the position.
Prairie hired Mr. Gmerek with the understanding that he would be honest at all times, which is fundamental to the position he applied for and that we had hired him for.
We had no idea that Mr. Gmerek was not an honest person and that he was capable of forging checks and committing fraud.
Due to the slim margins that we operate upon, when someone steals approximately $1 million of your profit over three years and falsifies all your internal accounting records to hide it, it creates a huge shock and an extreme amount of highly skilled accounting hours to undo, find and correct the mess. As well, the huge financial setback places a degree of pressure on our business that supports the businesses in Moosomin and supports many families who live in Moosomin.
Mr. Gmerek began issuing cheques to himself in January, 2009, after being at Prairie for only four months. Over the next three years he issued himself approximately 30 cheques totaling approximately $1 million. These cheques had forged signatures of Kirk Sinclair, Vern Hall and Bob Bazuk as the secondary signatory. These cheques also show Gregor's typical signature as primary signatory.
The cheques were falsely posted into our long-term inventory, resulting in a significantly lower profit margin.
I had the annual auditors do extra in depth audits to try and determine what was going on. However they did not find the fraud that was eventually uncovered.
After determining that something was wrong with our financials we dug into the books and eventually found the worse case scenario-that our business was doing very well but that the money had been taken by a dishonest employee.
As with any new employees you trust them implicitly. Unfortunately for Prairie we hired a person who was very smart and an extremely dishonest accountant and person who did not care about the business or the lives he would affect by his conduct.
After diligent searching to find out what was wrong with the business I found an entry that made absolutely no sense, which I brought to the auditors' attention, and I would not accept anything less than the full back up and supporting documents.
When Mr. Gmerek refused to forward these supporting documents to the auditors for several weeks with many excuses I printed the document they asked him for and sent it to them.
Within one day the auditors had found the two amounts and two cheque numbers which made up this entry.
On Dec.11, 2012, the auditors called Mr. Gmerek requesting the printouts for the last time.
I overheard the call, and he was visibly irritated with the auditors' persistence; and told them the account was too long to print off.
Shortly after this call Mr. Gmerek announced to the office administrative staff that he had to take his wife to Regina for a MRI that his wife had forgotten to tell him about.
I then was able to find and pull these two cheques with the help of my administrative staff.
That is when I finally knew the truth-they were both made out to Gregor Gmerek with forged signatures.
This is when I began a 20-hour non-stop search of every system generated cheque since June 2010.
By Wednesday morning, with the help of my staff and family, we were able to find 13 cheques out of several thousand totalling approximately $771,000 that had been paid to Gregor Gmerek and forged in the same way.
This evidence was taken to the RCMP Wednesday morning.
Immediately following, Mr. Gmerek was fired from his position with Prairie with the RCMP present.
When presented with some of the evidence, for an explanation all Mr. Gmerek said was "What can I say?"
I would like to thank our local detachment for their prompt attention to the criminal side of this crime.
Too many times these types of crimes take several years to come to charges, allowing the criminals time to escape back to their homelands and to hide and spend the proceeds of crime.
Our detachment did not allow that to happen.
Since the charges have been made public I have received a few calls from the shareholders of Mr. Gmerek's former employer "Farm Pure Seeds Inc." where he was Chief Financial Officer; I learned that they went into bankruptcy in Sept. 2009 with a $8,389,716.09 deficiency, in which the shareholders lost 94 per cent of their investment.
It is very unfortunate that people like this have often lied their way through life and have victimized honest people, crippling their financial well being with no remorse.
What everyone needs to understand is that when this crime is perpetrated many families in the community are affected because our business supports many businesses and supports many families. Tweet