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.)

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• 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?