Written by Tracy L. Coenen, CPA, CFF
Wisconsin Law Journal
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.
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.
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 president of Sequence Inc, a forensic accounting firm with offices in Milwaukee and Chicago. Ms. Coenen can be reached at 414.727.2361 or [email protected].