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Thwarting
Employee Embezzlement
(last updated August 1999)
Many employers think it can’t
happen to them, but white collar crime costs U.S. workplaces
a fortune each year.
Consider These Examples: A
former mayor admits he embezzled
money from his town, causing
the town to go broke. A receptionist
for an Orange County Bankruptcy
Court trustee pleaded guilty
to embezzling more than $160,000
by redirecting payments to
an accomplice rather than to
intended creditors. A California
park ranger stands accused
of skimming off more than $22,000
in camping fees. All of these
situations could likely have
been prevented with proper
security and accounting procedures.
No one has exact figures, but
a recent study by the non-profit
Association of Certified Fraud
Examiners estimated the annual
tab at several billion dollars
and that the average business
loses about 6% of its annual
revenue to internal fraud and
abuse.
The Likely Culprit—And Victim: An
embezzler could be anyone,
although most embezzlers are
employed in accounting and
finance departments and have
direct access to either cash
or accounting records. And
while you might expect otherwise,
all types of employers—public
and private, large and small—have
been targets. It’s important
to keep in mind that most often
an embezzler is a well- trusted,
apparently loyal employee who
has a great deal of discretion
in an environment with few
internal controls. Would-be
thieves frequently stay late
to work alone and avoid detection.
They often refuse to take vacations
because many schemes would
unravel quickly if someone
else took over the job for
even a few days. Here are just
some of the common tricks employees
use:
1. Skimming: One of
the most widespread techniques
involves an employee siphoning
off cash before it’s entered
into your accounting system.
One scheme, called “lapping,” is
where a bookkeeper steals an
incoming check and doctors
the receivables to show the
account has been paid. As a
result of computer tinkering,
customers don’t receive any
new invoices.
2. Fake Credit Slips: If
there is a high volume of credit-card
customers and a large number
of returns, any sales person
or cashier can run refund slips
for his/her own credit card.
Most retailers do not check
to see if the same credit card
numbers appear frequently as
refunds on their credit reports,
or ensure that every return
has a matching sale of merchandise.
3. Phony Invoices: Another
ploy involves an employee writing
up fake vendor invoices for
an entity the employee controls,
and slipping them in with legitimate
bills to be paid by the company.
A similar scam can occur when
an employee submits fake receipts
(or multiple copies of real
receipts) for reimbursable
expenses.
4. Depositing Your Checks: An
employee may receive incoming
checks and deposit them into
an account they opened using
a variation of your company
name, such as “Shell Co.” to
mimic Shell Oil Co. An employee
with access to corporate legal
documents can even open an
account in the exact name of
your company.
5. Altering Checks: An
employee may use erasable ink
to write checks. Then, once
you’ve signed the check, they
change the name of the payee.
6. Forgery: Employees
can make checks out to themselves
and forge the signature. Banks
frequently miss the fact that
the signature on the check
doesn’t match the one on the
bank’s signature card. Even
some unsigned checks have been
known to clear.
Take Cover: Purchasing
insurance against employee
dishonesty may provide some
protection from embezzlement
losses. The cost and specifics
of coverage depend on a wide
variety of factors, including
the amount of cash handled,
number of employees and type
of operation. However, it may
not be easy to collect on claims.
You’ll have to demonstrate
a fairly strong case against
the culprit, and show that
you’re actively prosecuting
the case.
Thwarting Embezzlement: The
most important step you can
take to prevent embezzlement
is to establish internal controls
for employees who have access
to cash, checks, receipts or
other accounting records—and
make sure they are followed.
Tightened procedures may also
help to increase productivity
by minimizing waste and uncovering
honest mistakes. Effective
controls include:
1. Background Checks: Conduct
thorough background checks
before hiring anyone, even
if a staffing agency supplies
the employee. Confirm all references,
verify degrees and licenses
and check for criminal convictions.
Don’t hire someone for a sensitive
position if you can’t get detailed,
positive references from past
employers.
2. Separate Job Functions: Never
allow the same person to approve
purchase orders, prepare billings,
handle collections and perform
other accounting procedures.
The person authorized to write
checks should not be reconciling
the bank statements. Even smaller
employers who don’t have sufficient
staff to divide up accounting
functions can do this. For
example, bank statements should
come unopened to someone other
than the bookkeeper—to the
owner’s home, if necessary—and
canceled checks should be examined
to make sure there are no irregularities.
Incoming checks should go directly
to the owner, manager or someone
other than the bookkeeper.
They should be endorsed with
the company name and account
number before being sent to
the bookkeeper.
3. Be Suspicious: Checks
should never routinely be signed
by anyone without examining
the supporting documentation.
If you must use signature stamps,
keep them locked up. Require
multiple signatures on checks
over a stated amount; print
the requirement on the checks.
Other effective measures
include: strong management
presence; written authorization
required for transactions;
properly recording transactions;
double-checking all accounts;
surprise cash-counts; controlling
the use of invoices and purchase
orders (be sure to cross-reference
them); and even requiring employees
to take vacations. |
