Embezzlement: How Prevalent is it at Private Clubs? What Can You Do to Prevent It?

It’s challenging to say how often staff members steal or commit fraud, deception, pilfer or purloin at private clubs, but suffice it to say, “It happens!”

Call it by whatever name you wish, but its effect is detrimental to a private club’s operation, its members and its staff.

It can be challenging to quantify the frequency and manner of fraud or stealing because it’s often underreported. There are usually varying levels of control, differences in a club’s culture, internal policies, and club sizes and various reasons why it happens.

So, how prevalent is embezzlement at private clubs? What do we mean by embezzlement and what can clubs do to prevent it?

A dictionary definition commonly defines embezzlement as financial crimes, which can include the theft or misappropriation of funds placed in one’s trust or belonging to one’s employer.

The broader definition breaks it down even more: theft, stealing, robbing, robbery, thieving, pilfering, pilferage, appropriation, abstraction, swindling, fraud, larceny, peculation, defalcation, purloining, white-collar crime and misuse of funds.

Detecting embezzlement is often difficult because there may be few warning signs. So, how prevalent is embezzlement at private clubs?

“It’s challenging to provide an exact prevalence rate of fraud or stealing at private clubs across the country because such incidents can vary greatly depending on various factors, such as the club’s size, management practices, members’ diligence, and the overall culture surrounding accountability and integrity within the club,” said Paul Kornfeind MCM, CCE , clubhouse manager at The Austin Club in Austin, TX.

Kornfeind is one person in the private club industry who speaks with knowledge. While working on his monograph in 2008 for his MCM with the Club Management Association of America , Kornfeind spent a year researching this topic.

“However, like in any organization or community, incidents of fraud or stealing can occur in private clubs. Clubs typically have measures to prevent such occurrences, such as security protocols, financial oversight, and member accountability systems. Nevertheless, no system is entirely foolproof, and instances of fraud or stealing can still occur,” he added.

“Most private clubs will have some level of theft or shrinkage within their inventory (merchandise, food, liquor, beer, wine, tobacco). Cooks may make a sandwich for lunch without submitting a cost transfer, or the beverage manager may list an item on the waste log claiming breakage, but it may just end up in their liquor cabinet at home,” said Ryan Oldroyd, CPA, MBA , chief financial officer of the ARIZONA COUNTRY CLUB in Phoenix, AZ.

“Schemes or fraud happen at the staff level as well, maybe because of the pressures of front-line staff workers being paid a very low wage. So, it may be tempting at a private club where most people are of high net worth to abuse the system in finding easy ways to ‘fill their pockets’ in some form or fashion,” he commented.

Kevin Reilly , partner, PBMares, LLP of Fairfax, VA, says, “The Association of Certified Fraud Examiners (AFCE), in its 2024 report to the nation on occupational fraud, stated that more than $3 billion was lost to fraud in 2023. ?

“Of this, 89 percent was from asset misappropriation schemes with a median loss of $120,000 and five percent was from financial statement fraud with a median loss of $766,000.?

“Almost half of all reported cases involved corruption. While clubs may have limited exposure compared to other businesses, they are not immune to the loss,” he added. ?

“Occupational fraud has four common elements.? 1) it’s clandestine, 2) it violates the perpetrator’s fiduciary duties to the employer, 3) it’s committed for the financial benefit of the perpetrator, and it costs the employer assets, revenue or reserves. ?

“Clubs are less likely to have it because of lack of cash. However, they are susceptible because small accounting staffs mean that there is frequently no separation of duties,” Reilly said.

“Theft at clubs comes in myriad forms, but if we are looking just at staff members, where do we see this?” asked Jonathon Goodman , president of Elevate–CFO & Technology for Clubs. Elevate, a member of the international nonprofit association Hospitality Financial and Technology Professionals (HFTP?) has a roster of chief financial officers with over 60 years of combined expertise in helping organizations.

“In my years, I’ve seen two major areas that are easy targets for staff: the food and beverage area and inventory items in the golf shop or fitness areas. While the food and beverage area tends to be less in terms of dollars, it is probably the biggest area of misappropriation.?

“Most clubs serve meals to their employees in some form. In addition, there are increasingly more Grab’N’Go areas in the club and around the premises.?

“Many times, employees will leave with additional meals to take home, which increases the costs of meals the club supplies. With the member Grab, we noted one time that the golf course maintenance personnel was taking water, Gatorade and snacks from the on-course locations. We only discovered this when a member noted that there were no drinks at the comfort stations on the course,” he added.

“With inventory in many locations, the staff will tell the golf shop staff or staff at any other location, for that matter, that I got approval for this; please charge it to uniforms. The single biggest area of concern at most clubs is that staff take merchandise and when the inventory is performed, it is most often incorrectly noted that a staff member did not ring in the sale to a member.?

“While this is noted to be a control issue, many controls are sacrificed in the name of proper service to the members. These are two areas of the utmost concern to me,” Goodman said. Phil Harvey , a Venture Programs principal, noted, “In over 35 years, I revisited numerous events that were toxic enough for insurance claims to be filed.

“The most common is in the food and beverage area, wherein an employee or, in some cases, a large number of employees are involved in the theft of inventories, either for their own needs or, in some cases, prolonged resale of goods. This normally is discovered in several months.

“Food and beverage is quite common since more grievous issues involve cash and paybacks between internal accounting and suppliers. This is usually more difficult to recognize since the fox is in the henhouse and is usually in the same position as confirming inventories on hand,” he added.

“In other instances, internal theft occurs in various departments, such as the pro shop – however, these days, very little cash exchanges hands. Probably the most serious claims today involve cyber issues affecting wire transfers and their transfer to disguised, non-recognized accounts.

“Each year, we experience numerous air fraud events that can have quite sizable consequences. Many clubs pay financial transactions by wire and it is imperative to carry substantial limits to protect against these AI-derived methods of deceit and deception! Fortunately, most clubs have public auditors who recognize ambiguous transactions,” Harvey explained.

Ronald Banaszak, CCM, CCE , a former club general manager and now executive vice president of International Business Development, Distinguished Clubs , says, “Since clubs are very relationship-oriented, and many employees have worked for their club for many, many years, and the fact that clubs are inherently poor at having written systems and having the systems followed religiously (with accountability), fraud is rather prevalent in clubs.?

“I am not saying this is large in dollar amounts, but the frequency can be high in a club without quality written systems and procedures.”

Mitchell Stump, CPA , principal with the Club Tax Network and author of the Club Tax Book, has provided the Club Whistleblower Hotline since 2012. Hotline comments, not all of which refer to fraud, support some of Stump’s comments.

“Since its inception, not one financial embezzlement has been reported. The only property thefts reported have been towels from the locker room and alcohol from the bar. Employee time theft has also occurred, but at what large organization has this not happened?” Stump queried.

“On this anonymous reporting hotline, the primary issues have been sexual harassment and discrimination concerns. ?

“Surprisingly, the majority of the reports have dealt with supervisors improperly acting out of what appears to be their frustration with the language barrier caused by Spanish versus English-speaking employees. I’d suggest that employee discrimination and harassment over language differences represent over half of the employee concerns. Fraud is not being reported,” Stump added.

So, what causes embezzlement to happen at a private club?

“The clearest way to express it is through the fraud triangle,” said PB Mares’ Reilly.

“Three elements need to come together: 1) Some type of perceived non-shareable financial problem/pressure, 2) some perceived opportunity, and 3) some way to rationalize the fraud as not being inconsistent with one’s value.

That’s a viewpoint shared by Banaszak.

“Fraud/embezzlement occurs when the following three situations are present:?

• Pressure: Motivation or incentive to commit fraud (gambling debts, high health care expenses, or lifestyle exceeding income)?
• Rationalization: Justification of dishonest actions (the club owes me), and
• Opportunity: The knowledge and ability to carry out fraud (access to usernames/passwords, journal entries, or keys)

“It’s the general manager’s responsibility to create and maintain systems (checks and balances) to ensure that employees can’t commit fraud and to break down the possibility of all three fraud characteristics,” stressed Banaszak.

“Embezzlement can occur because of various factors, often stemming from opportunities, rationalization and pressures,” said Kornfeind. “Here are some common causes.?

• Employees or members with access to club finances, such as managers or accountants, may be tempted if proper oversight is lacking.?
• Weak internal controls and oversight mechanisms provide opportunities for manipulation of financial records without detection.?
• Financial pressures, including personal debts or gambling problems, can also drive individuals to embezzle funds.?
• A culture of entitlement within the club may justify embezzlement as a means to supplement income or lifestyle.?
• Moreover, individuals with low ethical standards may rationalize their actions, aided by weak internal controls and a lack of ethical leadership.?

“These factors collectively increase clubs’ vulnerability to embezzlement if proper safeguards, such as segregation of duties and regular audits, are not in place. Addressing these root causes requires implementing robust internal controls, fostering a culture of transparency and accountability, providing ethical leadership, and conducting regular audits and financial reviews.?

“By addressing these factors, clubs can reduce the risk of embezzlement and safeguard their financial integrity,” emphasized Kornfeind.?

“I think embezzlement happens because the club has hired the wrong person to entrust its assets. Improper due diligence or not paying a competitive wage for the position will attract a lesser candidate,” asserted CFO Oldroyd.

“Private clubs are notorious for not having enough checks and balances, improper workflows and approval levels and non-existent segregation of duties.?The list goes on and on. ?

“First, most private clubs don’t have enough financial resources to hire two or three admin-level employees or staff accountants, so the top person has access to everything and controls everything. ?

“The top-level finance person has too much control over bank accounts and company credit card platforms, as well as too much control over the accounting software system.? Public companies are required to show evidence of such control levels, and even though a private club may have an annual audit, the auditors may recommend that better controls be put in place as a best practice,” he added.

“But most clubs turn the other way and aren’t willing to invest the time, resources, systems and training to do so. A certain culture is created in the admin/accounting office, which can become too loose and too lazy. ?

“No department manager wants to deal with the strict, unfriendly controller who requires certain steps to be followed or certain backup documents to be submitted. So, the controller will give in to be ‘more friendly’ with the staff. In some cases, even the GM/COO will encourage the controller to ‘loosen up.’ ?

“A strong director of finance, chief financial officer-controller will create a culture of holding each other accountable and put certain controls and policies in place to achieve a desired culture within the finance and accounting operation,” Oldroyd stated.

So, what are the warning signs something is amiss? There are many in the minds of our contributors.

• Employees, including managers, are resistant to more and tighter controls and the implementation of new systems.?
• Suspicious financial entries on the balance sheet.? Financial statement entries without adequate explanations and/or background information to justify the entry. ?
• Vendors overcharging the company for goods and services and a club employee receiving payments to approve the higher-than-market prices the club is paying in exchange for ‘kickbacks.’?

– Ron Banaszak

Red Flags

• Employee lifestyle changes
• Employee debt/credit problems
• Behavior changes? Substance abuse? Gambling?
• High employee turnover
• Refusal to take vacation or sick leave- unwilling to share duties – Kevin Reilly

Again, suppose the highest finance person has or wants control of every single account and is very protective of sharing information. In that case, bank account details, general ledger details, etc., are warning signs. ?

Has there ever been an independent full-scope audit performed? How about inventory spot checks? Who checks to see if the liquor cabinets are always locked? Who has the key or access code? Your club controller or top-level finance person must have the ‘trust, but verify’ approach to all aspects of the business.

– Ryan Oldroyd

Recognizing warning signs of fraud or embezzlement in a private club is crucial for early detection and prevention. Common indicators include discrepancies in financial records, such as unexplained discrepancies between reported income and actual funds or irregularities in expense reports and invoices.?

Sudden changes in an employee’s lifestyle, such as unexplained wealth or extravagant spending, may raise suspicion. Additionally, employees exhibiting unusual behavior, such as defensiveness or reluctance to provide information, could be red flags.?

Increased complaints from members about billing errors or unauthorized charges may indicate potentially fraudulent activity. Lastly, a lack of transparency or resistance to implementing internal controls or audits could suggest an attempt to conceal fraudulent behavior.

Being vigilant and addressing these warning signs promptly can help mitigate the risk of fraud and safeguard the club’s financial integrity.?

– Paul Kornfeind

“Unless the amount is significant, it may go unnoticed,” commented Stump.?

“As one CPA stated, ‘If the theft occurs one year, it may need to be repeated annually, as it is now in the budget.”

So, what specific steps can management take to prevent the problem in the first place?

“The only item in the fraud triangle that management has control over is not providing the opportunity. Rationalization and perceived financial pressure are out of the club’s control,” said PB Mares’ Reilly.

“Establish a robust system of internal control. However, there are limits. No matter how strong the system, there is always human error. A good system does not allow management override. It should also require more than one person to be involved in the fraud.? Require collusion. Finally, the system must be updated to reflect changes in operations or circumstances. ?

Key internal control concepts:

• Prevent before you detect
• Review organizational structure
• Divide the duties?
• Fix responsibility and lines of authority
• Limit the accessibility of assets
• Surprise your employees!
• Use cost-benefit analysis
• Communicate the control ethos, and
• Adopt written policies to clarify procedures
• Review the management letter from the audit and address any weaknesses identified.
• Don’t overlook the obvious.

“Regardless of the specific method, embezzlement often involves exploiting trust and opportunity for personal gain at the expense of the club’s financial integrity,” explained Kornfeind.

“To prevent fraud or stealing in a private club, management can take several proactive steps. They should establish strong internal controls, such as segregation of duties and regular audits, to ensure accountability and oversight of financial processes.?

He added, “Clear codes of conduct and ethical guidelines should be developed and communicated to promote honesty and transparency among employees and members.

“Ongoing training and education programs should be provided to raise awareness of fraud prevention and detection methods. Regular audits and reviews of financial records and operational processes should be conducted, with the possibility of hiring external auditors for independent assessments.?

“Security measures, including physical and cybersecurity measures, should be implemented to safeguard sensitive information and assets,” he stressed.?

“Whistleblower policies should be promoted to encourage the anonymous reporting of suspected fraud without fear of retaliation. Background checks should be performed on employees, especially those in positions of trust. Management should monitor financial transactions closely and enforce consequences for policy violations.?

“Leading by example with ethical leadership and integrity sets a positive tone for the organization. These measures collectively help reduce the risk of fraud or stealing, protecting the club’s financial integrity and reputation,” Kornfeind added.

In Oldroyd’s opinion, prevention starts “by hiring the right person at the tip and performing proper due diligence...both at the GM/COO level and top-level finance person. Leaders should be steadfast in creating a culture of honesty, doing the right thing, and following policies and procedures. ?

“I really believe we all need someone else to hold us accountable. That’s a simple question a GM/COO can ask each department manager…who holds you accountable for your work? Ask for examples. The highest-level finance person absolutely needs someone to hold them accountable. The GM/COO should have access and fill this role somewhat,” Oldroyd added.?

“Even if a club treasurer has a very strong background, they should ask relevant and pertinent questions during the financial and internal controls review. Even though this may seem intrusive and beyond the scope of the treasurer’s role, it helps create accountability for the highest-level finance person. ?

“All clubs should have an annual audit by an independent CPA firm. Lastly, don’t skimp on the proper staffing levels and resources in the accounting/finance function. Often, the finance person is also tagged as a human resources generalist or information technology and audio-visual expert. If stretched too thin, somewhere it will break,” he cautioned.

And when it comes to purchasing, “Bid out pricing on items once or twice a year to multiple vendors,” stated Banaszak.

“This is where quality purchasing software comes into play, allowing a club to get competitive bids in a time-efficient manner. Have a different person take food, beverage and merchandise inventory without notice. This is to verify the inventory levels,” he added.

“Understanding how the budget for each department is created and then monitoring the under and over items is extremely helpful,” commented Stump.

“The treasurer could do or observe the bank reconciliations occasionally, unscheduled, and the treasurer could personally hand out checks or pay stubs to employees occasionally.”

Publisher’s final thoughts

As our contributors have suggested, embezzlement happens for many reasons. However, for private clubs, the answer lies in recognizing warning signs and taking action.

That means being vigilant and proactive to prevent problems from arising in the first place. And we leave the final comment to Kevin Reilly with these tips:

Get the audit committee involved. ?

1. Evaluate management’s assessment of the significance and likelihood of your company’s fraud risks — especially the pressure to meet budget.
2. Evaluate the internal control best practices management has implemented to address each fraud risk.
3. Ensure your company periodically uses a research-based tool to measure the effectiveness of the CEO’s efforts to create the right ‘tone at the top’ to promote ethical behavior and deter wrongdoing.
4. Tell management you have zero tolerance for any ‘cooking the books,” and continuously evaluate management’s integrity. Even small untruths are telling.

At least, that’s the way I see it.