Twice bitten.(Editor's Note)

THE NEWS THAT YET ANOTHER vice president of USA Drug Co. of Pine Bluff had been charged with embezzlement suggests that even businesses that have been bitten once still may not be shy enough.

Garret Sorenson, who was VP for advertising, his wife, Katherine, and her sister, Shannon Waiters, were indicted last week by a federal grand jury on 33 felony counts--one of conspiracy to commit wire fraud, 29 of mail fraud and three of money laundering.

What they allegedly did is categorized as billing fraud by the Association of Certified Fraud Examiners, a national group that makes a science of such things. Billing fraud is a common type of asset misappropriation, which is the most common of the ACFE's three categories of occupational fraud. (The others are fraudulent statements--what you and I might call "cooked books"--and corruption such as bribery and kickbacks.)

One doesn't need a very long memory to recall that USA Drug was the victim of asset misappropriation by its vice president for finance, John Atwood, between 2001 and March 2004. The company had filed a civil suit in February 2005 (a case that's still pending, but moving slowly), and Jefferson County prosecutors charged him in criminal court in June of that year. It would be more than a year before he entered his guilty plea.

Yet, according to the indictment, Garret Sorenson and his wife and sister-in-law allegedly started their scam in late 2005--right in the middle of the whole Atwood mess.

Garret Sorenson was responsible for direct-mail advertising and media placement. Up through late 2005, according to prosecutors, the company contracted with two outside vendors for those ad placements, paying a 5 percent markup for the services.

Then Sorenson hired a new company for media placement and direct-mail: Multi-Media Management. He didn't tell his bosses at USA Drug that MMM was really his own company, formed with his wife and sister-in-law.

You can guess the rest. Over the next couple of years, MMM allegedly sent USA Drug inflated bills for advertising services (conveniently omitting the original vendor invoices), defrauding USA Drug of more than $525,000--almost as much as Atwood stole.

Atwood was guilty of asset misappropriation, but his scheme was very different. He wrote checks to himself and his wife's business using an employee benefit trust account, over which he had sole control. So maybe the LaFrance family, which owns USA Drug, wasn't on the lookout for billing fraud--although it certainly isn't anything exotic. Back in the mid-90s, Kevin Wheeler abused his position as CFO of CDI Contractors of Little Rock to embezzle $1.3 million by creating fake bills and paying them to himself.

Late last year, the Association of Certified Fraud Examiners issued its fifth "Report to the Nation on Occupational Fraud and Abuse." Here are some of its findings:

* Of almost 1,000 cases analyzed, the median loss was $175,000, but more than a quarter involved more than $1 million. And the smaller the company, the larger the loss tended to be.

* Proper internal controls were lacking in 35 percent of the cases, but tips were still the most common means of detection. Forty-six percent of cases were detected by tips--much more than by audits, controls or any other means.

* In 39 percent of the cases, the fraudster displayed the most common behavioral red flag: He was living beyond his means. And, if federal prosecutors are right, the Sorensons and Walters fit that description. They allegedly received at least $248,000 of the embezzled funds and used the money to buy a boat, a Jeep and a Suburban.

* Seventy-eight percent of victim organizations made changes in their anti-fraud controls after discovering a case of occupational fraud. If my math is right, that means 22 percent didn't. Maybe those were the companies whose controls actually detected the fraud. Or maybe those are companies that are ripe for a second bite.

Gwen Moritz is editor of Arkansas Business. E-mail her at gmoritz@abpg.

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