A former executive at a San Diego-based Department of Defense contracting firm pleaded guilty this week to embezzling more than $825,000 from the company, the U.S. Attorney’s Office said.

Out of Control Personal Spending

Stuart Teshima, the former chief financial officer of Epsilon Systems Solutions, used the funds for travel, jewelry, fine dining, gifts for family members and furniture.

One expense was a bill from the University Club in downtown San Diego for more than $5,000, according to his plea agreement. He also used the credit card to pay for his own personal federal tax bill, prosecutors said.

Teshima, 50, who oversaw the company’s credit card program, admitted changing his account statements, replacing the personal expenses with fake business costs, such as advertising or small business credit monitoring.

Scheme Lasted 7 Years

The thefts began in 2008 and continued until his departure in August 2015. During that time he served as a company vice president and senior vice president before becoming CFO.

Epsilon Systems Solutions, with offices across the country, contracts with the military for services that include ship building, nuclear operations support, engineering and information technology.

Shock and Dismay

“Over the entire history of Epsilon the company has operated at the highest standard of ethics and integrity, and this of course comes as a shock and dismay to find out of this internal theft,” said Dwayne Junker, a company senior adviser.

“When Epsilon finished its investigation of the theft, it presented all of its evidence and conclusions to the federal prosecuting authorities,” Junker added. “Epsilon has concluded that none of its customers have been negatively impacted by Teshima’s theft.”

Teshima will be sentenced in San Diego federal court in December.

Internal Fraud is an Epidemic

Internal fraud has reached epidemic proportions. Over $600 billion are lost in the United States alone each year to insider fraud; an amount representing at least 5% of annual U.S. company revenues.

Technology has made it easier than ever for fraudsters to steal money from companies. It is simple to modify accounting statements, move funds from one account to another, and create fake invoices.

Small businesses are vulnerable to internal frauds and are disproportionately affected by them.

Common Suggestions to Fight Internal Fraud Are Not Workable

Aside from hiring a new CFO, Epsilon’s managers are faced with the assignment of preventing future internal frauds from happening again.

Changing auditors is one common outcome of dealing with an internal fraud. However, tax accountants are often not trained, and are usually not responsible for finding fraud in their clients’ data.

Another common suggestion is to implement segregation of duties so two people sign off on financial transactions. Unfortunately, this step rarely works either in small organizations. Small businesses are not usually profitable enough to provide the manpower required for this task.

Epsilon managers’ learned too late they did not know a trusted employee as well as they thought they did. Studies show trusted employees who have never encountered legal trouble commit internal frauds, not new hires. Pre-employment screens for potential embezzlers are useless.

Hire a Computer + Human Watchdog Instead

What Epsilon needs to do is add an affordable and efficient watchdog to their internal audit process.

DFND Analytics’ computer + human internal audit tools are designed for this job.

DFND looks at an organization’s enterprise and accounting data and runs more than 30 standard and proprietary forensic checks to search for anomalies and suspicious transactions. A DFND financial professional reviews every report before it is sent to company management.

Learn how DFND can provide your organization with greater internal audit insight.