Sunday, April 13, 2014

Fraud In the Wine Business: A Repeating Story

Is Anyone Looking?
The wine business is filled with hard-working owners who are passionate about their craft. Never has there been an industry who's owners are more willing to work for almost nothing, just to be in the winery club. No matter if you came in as a farmer, financier, film-maker, or from family money - if you are in the wine business you are accepted with open arms into the brother/sisterhood of the business. Everyone is willing to share and trust their neighbor. It is a hospitality industry and all our instincts are open and accepting, really as a normal reflex to see the wine business as we all want.

All those thoughts seem wrapped up in the romance and feel of our business and makes this such a cool place in which to work. Then this past week I saw the following news report:
  • Xandria Roxanne Neal, 44, of Hidden Valley Lake, CA plead not guilty today to 29 counts of embezzlement of more than $300,000 from from St. Helena's Rutherford Wine Company, where she had been an accounting clerk since 2009. The incidents occurred between September 2011 and January 2014. She allegedly used gift cards with a company credit card and used the money for personal purchases. 

A Repeated Story

Where Does One Get a Mani in this Joint?
I don't know about you, but I have an emotional reaction to this kind of story. It's really a kick in the gut for me. It's a violation of the tenants that make this business so special. If you get that same reaction, you might say to yourself this must be a unique situation and would never happen to me. But a quick web search using [embezzlement wine] led me to the following stories:

  • Tiffany Lee Savastano, 33, of Redmond, Oregon, was sentenced this week to more than six years in prison for embezzling $229,000 from her former employer, Cooper Mountain Vineyards in Oregon. 
  • Michelle Lynn Davis, 23, A bookkeeper for Shannon Ridge Winery in Lake County, California was arrested on a charge of embezzlement Jan. 2 for allegedly taking more than $150,000 from her employer.
  • Chris Mulcahy, 50, was formerly the chief financial officer of Brutocao Cellars in Hopland California and was arrested Saturday on suspicion of embezzling about $250,000 from Brutocao Cellars.
  • Cynthia Gonzales, 37, of Turlock and Sharon Verville Lopez, 37, of Ripon were sentenced to six months in jail for the theft of funds from Bronco Wine Company in Ceres. Both entered pleas earlier this week in Stanislaus County Superior Court to felony grand theft.
  • FBI agents and Mexican immigration officials arrested Martin Christopher Edwards last week. The 48-year-old, from Napa, California, has spent more than half a year on the run in Mexico after being indicted in June 2013 for 23 counts of mail fraud, wire fraud, money laundering and embezzlement of approximately $900,000 while working as vice president and general manager of the Wine Tasting Network.
Everyone Else but Not Me

These stories aren't uncommon in the wine business. Having worked in the business as a banker since the early 80's, I see far more defalcations than this public sample. Many embezzlements never hit the press. Rather than going public, many owners fire the employee and don't report the crime because they feel shamed at being duped. But if you're a winery owner and have been a victim of embezzlement, my advice is get over the embarrassment because you aren't alone. There are enough of your neighbors out there to start a support group.

Idyllic Lifestyle Where Nothing Bad Happens
If it hasn't happened to you, you might think you have your bases covered. You might have trusted family members handling the books. Sadly, embezzlement and fraud happens in families too. Talk about a real kick to the gut! Maybe you think this level of fraud is normal across every industry, or maybe you see it as a sign of the times but I've not seen this consistent level of thievery in any other industry in which I've been involved.

I think there are 2 main factors that contribute to what appears to me to be a higher incidence of embezzlement. 1) The trusting and hospitable nature of the business, 2) the low value placed on accounting and proper management reporting.

The wine business contrary to consumer thinking isn't rolling in cash. Winery owners direct their precious resources to things they value and spend first on the vineyards, wine making, hospitality, travel and entertainment to support markets, insurance, direct to consumer sales, the newest basket press, landscaping, balloons on the road, and a litany of other things well before getting to such mundane things like putting in good systems and procedures, and spending on good advice.

Some Solutions

A Reviewed Financial Statement with a reputable industry focused accounting firm should be the minimum standard for a commercial winery. A reviewed statement from an industry expert brings the been-there-seen-that factor and includes the testing of important systems and controls. The Review will say on the cover page that management is responsible for the preparation and fair presentation of the financial statements.

The CPA won't guarantee there is no fraud but engaging an auditor for a Review does establish a more relevant relationship versus just tax preparation or compiled statements. You can ask in conjunction with the Review that the CPA focus on certain areas that are important to you. You can ask them to focus on your systems, controls and procedures to avert fraud and they will give you suggestions in a letter to management that will show both findings and suggested changes. Sure there is a cost to this level of engagement by your CPA, but you are willing to spend on insurance? Why not buttress your business against fraud and pay to have your CPA look over your practices and those of your employees.

The Basics of Fighting Fraud in your Business:
  • Set internal controls, such as separating the control of accounts payable and accounts receivable. 
  • Always have two sets of eyes on the books.
  • Trust but Verify: Take measures such as getting unopened bank statements and keeping separate on-line logins to bank accounts.
  • Limit access of banking, accounting records, and systems to only those required by a given employee
  • If a new vendor shows up in the books, check to be sure its legitimate.
  • Insist those in control of cash in the business take two weeks of vacation annually and cross-train others to handle those roles.
  • Use a CPA as you would insurance. Figure out how someone could steal from the business and then make changes.
  • Vary routine and make it clear to employees there are audits of accounting records on both a routine and on a surprise basis.

Are you vulnerable to fraud? Take the Fraud Prevention Check-Up here.

(Note to my CPA friends out there: I would greatly appreciate your views here - so please feel free to log in, leave your name and identify yourself as a CPA and/or the name of your firm, but remember beyond identifying your expertise, the blog isn't for commercial promotion. All that said, if you are willing to share your thoughts, I'm sure the community here will appreciate it.)

What do you think? Please log in, join the site at the top of the page, and weigh in with your views for the benefit of the community. 

If you think this is valuable information, please share this on your favorite social media platform.

  • Why do you think employees think they can get away with fraud?
  • What measures do you take to avert fraud?
  • Do you have experience with a fraud and if so, what changes have you since made in business?
  • Do you think this level of embezzlement is normal for an industry? 


  1. Yes, this industry enjoys a much higher level of embezzlement than the average, due in part to lean bookkeeping staff, and minimal amount of resources invested in the accounting processes, especially in small wineries.

    Another way to consider this is that most fraud is committed when three things are lined up:
    1. Personal financial pressure (on the part of the fraudster)
    2. Opportunity
    3. Rationalization

    A winery owner can’t control #1, but #2 is controllable to some extent, and #3 can be influenced.

    We can never remove 100% of the opportunity, especially in a small office where only one or two accounting staff are involved in the bookkeeping processes. We can only reduce that opportunistic chance by an effective segregation of duties. Look to your CPA to help design and implement those. One big improvement for most small wineries is to separate the A/P and check writing process from the bank reconciliation process. Just sending the message that controls are in place and are being enforced often discourages fraud.

    Rationalization is connected to job satisfaction, and can be influenced by management’s respect extended to staff. It’s much more difficult for an employee who have numbers 1 and 2 covered, to rationalize their crime when they feel supported and appreciated by the owners.

    Paul Hoffman CPA
    The Hoffman Group LLC

    1. Good morning Paul. Thanks for logging in and sharing your view.

      I would underscore your one point: "Just sending the message that controls are in place and are being enforced often discourages fraud." That does get to your point #3 as well.

      Wine owners have to share some of the responsibility for embezzlement when they leave a wide open opportunity. I don't think we can ever make a business bullet-proof from fraud, but telling everyone not to eat the cookies in the jar, and then just leaving the jar open and out on the breakroom table is likely going to lead to a loss of cookies.

      It struck me in reading through the multiple stories out there that so many of them were multi-year frauds. I think when owners do the basics to defeat and detect fraud - when employees know that the business is being watched, these kinds of frauds are less likely to start, and less likely to continue.

    2. Paul - can you please provide some statistics to back up your claim:

      "this industry enjoys a much higher level of embezzlement than the average"

      I would like to see this statistic and proof, especially if you can also provide one for family centric businesses overall, regardless of industry.

      Thank you,

    3. Chris - I doubt that there are stats on the level of embezzlement in wine industry versus family centric businesses and while I don't want to speak for Paul, I think he might be repeating something I said above in different words. My experience is there is more fraud and embezzlement in this business than any other in which I've been involved. That's not stat but it is 35 years of being on the inside of many businesses as a banker. If there are stats available, I suspect the place you will find them is through the Association of Certified Fraud Examiners:

      If you or Paul find anything interesting, please let us know!

    4. I don't think this is limited to the wine industry. In my little upstate NY community, we've had around 5 of these embezzlement cases hit the local newspaper, involving our local transit authority, a cemetary association where many of the board of directors had 'aged out', and a local school activity support organization. Not all were small organizations.

    5. Anon 11:09 - You are absolutely correct. I did post some interesting stats at the bottom of the page (4-14-2014, 4:35PM). Small organizations are the largest sufferers of embezzlement but its pretty clear the numbers are well under-reported. Its estimated only 2% of small-business victims report fraud, while 40% say they have been victims of embezzlement. But it's not limited to small business or wineries. It may simply be that the wine business is virtually 100% family owned and that could be the largest factor in what I have seen as a higher incidence of fraud versus other industries in which I've served as a banker.

  2. Part of the blame for "the low value placed on accounting and proper management reporting" has to come back to the accounting profession as we have traditionally done a very poor job of explaining exactly what it is that we do. Both internal and external accountants need to spend more time asking questions and explaining the meaning behind the numbers than manipulating details. Together, we can be a great team. We have seen owners actively participating in training and sharing numbers with their teams. The wine industry has made great progress in recent years.

    These issues go far beyond the wine industry and apply to small business owners of every sort who tend to hand over the numbers and then abdicate all responsibility. "Trust but Verify" needs to be engraved in big golden letters on every office wall.

    1. Geni - thanks for logging in and sharing your thoughts.

      I know as a banker, I get pushback all the time from prospects and clients about the accounting fees that "we are making them pay." Many times I have heard a winery owner say, "The financial statements are for the bank."

      While I don't think owners have to have CFO level financial skills, the statements should ALWAYS be for themselves first. It would be like driving a car without any road signs and no gas gauge or speedometer. The trends and numbers mean something and define a path. But regardless of that pet peeve, one of the many byproducts of CPA oversight should be a frank and open discussion about process and procedures in place and a hard look at where you are vulnerable to theft. That isn't something you will get if you are just having the CPA do the taxes and put their stamp on your Quickbooks.

      Trust – but verify! (Wish I could write that in gold)

  3. Spot on article (like usual!) item in addition to the causal factors you've nailed - the inexact nature of the wine-production beast. At any given moment, there are many lots of inventory in various stages of production, and insufficient accounting records (as compared to other industries). Losses due to evaporation, spillage, reclassification, etc. etc. It is a tough business to track down to the case...that thus opens the door to creative accounting at times (note most of the quoted infractions were financially brokered). Your solutions are good ones - most importantly, have two sets of eyes on the prize, along with oversight (both mgmt and outside audit).


    1. Thanks Anon 9:33,
      Your perspective isn't one I thought of when writing the article but its a good one. Inventory is one of the largest assets in the business and there is a general lack of control over it. There is evaporation and spoilage at the bulk level and thats probably when its most difficult to account for missing gallons. Unfinished wine though doesn't generally have as much value to a thief. Wine bottles however have definately vanished from wineries and there have been several public embezzlemants with cases taken from winery storage and warehouse storage and sold on the black market. As the bottle price increases, the temptation for theft increases right along with it.

  4. Note to self: When you write an article and expect CPA's to participate in the discussion .... don't do that on April 14th! Haha

  5. Chris asked above about some stats so I found some that I thought were interesting:
    1) estimated median losses for small organizations — those with fewer than 100 employees — that experienced a fraud were $147,000 last year.
    2) Small organizations are the most common victims in fraud instances at 31.8 percent — the highest rate of any business size category. (For example, organizations with 100 to 999 employees had a fraud incident frequency of 19.5 percent; 1,000 to 9,999, 28.1 percent; and 10,000 plus, 20.6 percent.)
    3) The five most common fraud schemes for organizations with fewer than 100 employees were: billing fraud, corruption, check tampering, skimming and expense reimbursement fraud. Corruption schemes deal with crimes such as bribery, illegal gratuities and kickback arrangements.
    4) The largest number of perpetrators, 41.5 percent had been with the organization between one and five years, most of them had a college degree and worked in the accounting area.
    5) Approximately 87 percent of occupational fraudsters had never been charged or convicted of a fraud-related offense

    NOTE: It's difficult to estimate the true losses from employee frauds. Small businesses often don't report these crimes because of families' embarrassment, decisions not to file criminal charges or wanting to keep knowledge of the crimes privy. Only a small number of small business embezzlement victims — roughly two percent — report crimes even though 40 percent of small businesses report they have been victimized, according to a May 16, 2011, article in The Daily Record.

  6. My situation in Ohio isn't outright fraud, but does relate to the lack of ethics and principles on the part of some wineries in Ohio as well as our Food Safety Division of our Ohio Dept. of Agriculture. About 4 years ago they went around trying to issue licenses to wineries as food processing facilities, with the attendant code regulation nonsense. We then put a bill in our state senate to remedy the situation but some of the larger wineries that also bottle grape juice lobbied against us. As this violates my principles of winemaking I gave up wholesaling to fight it. The regulation is duplicate of sanitary code in our liquor laws plus a whole lot more nonsense. As well the Ohio Dept of Ag also controls money for marketing that favors those wineries the most. The regulation is totally unnecessary and also serves to discriminate against smaller wineries in Ohio. Other states wineries are also not subject to the same regulation to have the duplicate permit and as such the state of Ohio treats wineries in other states better than the wineries in Ohio and also often better than the out of state wineries own states as some do not allow sales to retailers in their states. For further information you can see: or

    1. Keith - not fraud, but not an honest legislative action. Its not the first or the last time we'll see that kind of activity.

  7. Paul and Geni are spot-on, but building on Geni’s post:

    1. Accounting is a different language, like Spanish or Mandarin, and we in the profession should assume owners have at best a rudimentary understanding. Accountants must translate the numbers. A good rule of thumb is, if you explain it to an elderly parent/grandparent and they get it, you’re doing a good job.
    2. Any business owner is primarily (and rightly) focused on Sales. Take the time to talk in their language. Example: “By taking action XYZ, you can save $1,000 annually, which is like making a $2,000 sale.”
    3. If you’re the owner and your accountant isn’t attempting to do #1 or #2, ask them to. If they can’t/won’t, get a new accountant.
    4. For both the accountant and the owner, before sitting down to talk remember Dale Carnegie’s words: “When dealing with people, remember you are not dealing with creatures of logic, but creatures of emotion.” Sounds harsh, but can help prevent a lot of loss, financial or otherwise.

    1. Jon - thanks for logging in and offering your thoughts!


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