The
Fraud Files
A
thief among us: Lessons from Bielinski Bros.
By
Tracy L. Coenen
Dec.
28, 2005
 |
| Tracy
L. Coenen
|
During
the summer of 2004, a major shakeup was occurring at the Milwaukee-area home building
firm of Bielinski Brothers, Inc. Their chief financial officer, Robert Brownell,
was fired along with several trusted employees, amid allegations that a complex
fraud scheme had been ongoing for years.
While
this particular case is complex in terms of the players and the flow of money,
the basic principles of fraud remain the same. There are certainly lessons to
be learned from this situation. Most notably, the owners of Bielinski Brothers
may have placed too much trust in their employees, the same infraction committed
by many businesses of their size.
Closely-held
businesses often place a great deal trust in their employees, allowing them access
and opportunity to commit fraud. This trust is exacerbated by the fact that many
closely-held companies do not have adequate systems and processes in place to
safeguard their assets. Trust without safeguards has been the downfall of many
businesses.
The
Players and Schemes
Bielinski
Brothers was founded in the 1960s and was run by family members until Brownell
was hired in 1995. Brownell was promoted to CEO after five years of successful
land acquisitions. By all accounts, Brownell was successful in his career, helping
to build the company in terms of home sales and land purchases.
Recently,
Brownell pleaded guilty to embezzling millions of dollars from the company as
the mastermind of a complex fraud involving at least nine other individuals. The
loss to Bielinski Brothers is estimated at $12 million, although exact figures
may never be determined. The fraud went on for four or more years, and it is believed
that Brownell personally pocketed about $10 million.
The
Bielinskis became suspicious of Brownell in 2004, noticing that he spent more
time out of the office or with his office door closed. They also noted that Brownell’s
expense account was growing, and that some unusual invoices came through the company.
Employees seemed uneasy prior to his firing, but no one reported anything substantive
to the Bielinskis.
The
average internal fraud scheme lasts 18 months, so this case is beyond the norm
that business owners might expect. Research has shown that an anonymous hotline
can cut internal fraud losses in half, so a tool such as this may have decreased
the time and magnitude of the theft from Bielinski Brothers.
Brownell’s
annual salary of $175,000 plus perks may be an indicator of the level of the trust
placed in him. The Bielinskis said that their “gut” told them that something
wasn’t right. It is important for business owners and executives to follow
up on those instincts. They are in the best position to make those judgment calls,
and the time and cost involved in following up on suspicions is tiny in comparison
to the monetary losses from frauds that are allowed to continue.
A
billing scheme was devised to steal funds from the company. Allegedly included
in this scheme was Robert Mann of Mann Brothers Construction, who has pleaded
not guilty to federal charges. It is alleged that Mann inflated bills for bona
fide work done for Bielinski Brothers, and also billed the company for work done
on behalf of Brownell personally. Brownell and Mann are believed to have split
the proceeds from the billing scheme.
Billing
schemes are commonplace in cases of embezzlement. Generally, the perpetrators
are able to exploit weaknesses in the systems of the company. Specifically, they
may utilize authorization levels to their advantage, having conspirators submit
bills that fall below the dollar level at which further scrutiny is aimed.
Other
times, the perpetrators are in a position where they are the final authority on
payments to vendors, so authorization of large payments is easily accomplished.
As CEO of Bielinski Brothers, it is likely that Brownell had wide authority to
generate and approve large payments to vendors.
The
CFO of Bielinski Brothers, Joseph Harvey, was allegedly in on the scam as well.
Collusion between the CEO and CFO most likely would have eluded detection by the
company’s owners, even if good safeguards were in place. This emphasizes
the need for multiple checks and balances, particularly at high levels of management.
The more safeguards and checks in place, the less likely that colluding executives
will commit acts in a vacuum.
Other
players, who have pleaded guilty, include David Busch, Norman Hanson, and Michael
Gral. Busch was a consultant who worked with Bielinski Brothers between 2003 and
2004. Hanson provided bona fide services to Bielinski Brothers through Welch,
Hanson, and Associates, but also set up a shell company to bill the victim for
services never rendered. Gral was the company’s outside legal counsel and
is accused of fraudulent billings to Bielinski Brothers in addition to other participation
in Brownell’s fraud.
Lessons
Learned
In
every fraud case, there are lessons to be learned about a company’s policies,
procedures, and controls. Victims of internal fraud are not always eager to reassess
how they do business and how procedures should change to prevent fraud in the
future. I often see owners resting on their laurels because they believe that
the removal of the “bad egg” removes the risk of fraud.
Changing
policies and procedures to allow for greater oversight of those in positions of
trust can have a significant impact on employees in general. When employees perceive
that companies are actively seeking out fraud and punishing offenders, they are
less likely to commit fraud. Therefore, it follows that the implementation of
better controls will send a message to employees that the owners are serious about
preventing internal fraud.
Background
checks are an important part of the hiring and promotion process. As public information
becomes more easily accessible through the Internet, relevant data is more likely
to be uncovered. This data can be used to make better hiring decisions, as it
can alert management to factors that might make an individual more likely to participate
in a fraud.
In
this case, a background check did not uncover two bankruptcy filings in Virginia
or court-ordered supervision. I consider this a failed background check because
relevant public information was not revealed. Had the Bielinskis known, they may
not have hired Brownell. At the very least, they might have supervised him a little
closer based upon his personal financial problems. However, even if the process
is not perfect, it is an important step that still should be taken.
Oversight
of vendors is important. In this case, Mann Brothers was doing approximately $20
million of work each year for Bielinski Brothers. This is almost 20 percent of
the annual gross revenue of Bielinski Brothers, and as a major business partner,
the relationship should have been given more scrutiny. It is important that purchasing
managers and others in charge of doling out a company’s contracts not be
allowed to become too close with those providing services to the company.
Higher
employee turnover at Bielinski Brothers following Brownell’s promotion to
CEO was not a red flag to the owners. However, things like this should be monitored
closely. Exit interviews should be conducted with all employees, as they could
yield important information about the company and its personnel and operations.
It
is unclear whether or not Bielinski Brothers experienced financial difficulties
during the tenure of Brownell. However, a telltale sign of fraud in companies
is a constant cash flow problem, even when business is growing. While it takes
cash to grow a business, a prospering business that is doing well operationally
should not be constantly cash poor. Dipping into cash reserves or lines of credit
faster than the company’s growth is a cause for concern.
The
Fallout
Numerous
lives have been affected by the fraud perpetrated against Bielinski Brothers,
and those include the families of the thieves and victims alike. The fallout at
the company includes the firing of six employees, three of whom were later indicted
for federal offenses. Instead of expanding in 2005 as planned, at least 20 workers
were laid off, and land acquired during Brownell’s tenure was sold. A former
employee describes the atmosphere at Bielinski Brothers as tense and suspicious.
Brownell’s
personal proceeds of the fraud have not been found. While the usual perpetrator
of fraud exhibits some sort of expensive habit like gambling, drugs, or infidelity,
none of those have come to light in this case. Brownell’s attorney says he
intends to repay the Bielinskis in full, and continues to work in real estate.
Fines,
restitution, and prison terms will likely be handed down to those found guilty
of participation in the conspiracy. While this accountability is certainly important,
it may be of little comfort to Bielinski Brothers, a company that has suffered
under the financial strain caused by Brownell.
Most
of the departments at Bielinski Brothers are now led by family members, rather
than outsiders. The current CEO of Bielinski Brothers, Frank Bielinski, states
that the company’s financial position is now strong, in spite of the theft.
I can only hope that the owners use every bit of intelligence from this fraud
to protect the company in the future.
Tracy
L. Coenen CPA, MBA, CFE is the president of Sequence Inc, a forensic accounting
firm with offices in Milwaukee and Chicago. She is a nationally-recognized expert
on fraud and financial investigations, and can be reached at
tracy@sequence-inc.com or 414.727.2361.
