Embezzlement: Guidelines to Uncover and Prevent it



Embezzlement is a widespread nightmare in business and the public sector. If you surf the Internet using the key word, embezzlement, you’ll find seemingly countless headlines.

Yes, embezzlement can happen anywhere to any organization. Executives commit 18 percent of fraud, according to a report by the Association of Certified Fraud Examiners (ACFE).

ACFE, in calling it “occupational fraud” also said accounting department employees commit 29 percent of fraud.

ID-10074458 chanpipatManagement has to create an environment that will deter dishonesty. That’s a major responsibility of the board of directors and management.

Thorough background checks on new employees are necessary. You must avoid the common background-screening gaffes.

In new-employee orientation, discuss your company’s financial principles. Diplomatically emphasize that deceit, fraud or theft aren’t tolerated.

When policies are explained well, good employees will respect proper internal financial controls.

After all, without internal controls it’s easy for an employee to hide checks that arrive from customers and stamp them with their own personal bank account numbers.

If invoices aren’t recorded, even salespeople can personally benefit by selling products on the black-market or Craigslist.

Embezzlement case study

Actually, it doesn’t hurt for everyone to know financial procedures. As a Seattle business-performance consultant, I’ve been called by organizations to fix problems from embezzlements.

Other than dishonest employees, each organization had the same issues:

1. There were insufficient financial and inventory controls

2. Insufficient HR training for all the employees

In a water-utility agency embezzlement-scandal that created negative newspaper headlines,  the utility company asked me to implement a PR crisis-management program to calm utility ratepayers.

But that wasn’t going to solve the core problem.

It was only the tip of the iceberg — symptomatic of a much larger problem. At first, I wondered why the honest employees didn’t spot the embezzlement — over several months an employee embezzled a few hundred thousand dollars to buy cars for all her grandchildren.

Then it became obvious the agency was riddled with cultural issues and poor customer service, and it needed to train employees on how to be on the lookout for embezzlement behavior as well as installing financial controls. A PR campaign would have to come later.

Fortunately, the HR training program solved the agency’s cultural issues –employee morale, teamwork, communication and poor customer service. The agency’s situation improved enough that it greatly alleviated the PR crisis so PR strategies were unnecessary.

Yes, fraud could have been prevented by alert co-workers. It doesn’t matter how much you trust employees, make certain no one finds it easy to commit embezzlement. In each of the above embezzlement examples, trusted employees were the culprits.

Yes, I know, it’s difficult in small companies because they can only afford a bookkeeper. But it’s possible to take precautions.

When policies are explained well, good employees will respect proper internal financial controls.

Typical sources of embezzlement

Here are the customary, potential problem areas:

  • Bookkeeping
  • Cash disbursements
  • Data processing
  • Inventory control
  • Purchasing
  • Receiving

Embezzlement red flags

Anticipate and analyze each area in which problems can arise. Write policies and strictly adhere to them in order to prevent thievery.

Here are the usual embezzlement red flags:

  • Abnormal increases in sales returns, which can hide payments for accounts receivable.
  • Atypical bad-debt write-offs.
  • Abnormal declines or uncommon small increases in cash or credit sales. This might be an indicator of unrecorded sales.
  • Bounced checks are often a sign of chicanery.
  • Shortages in inventory can mean employee thefts via phony purchases and unrecorded sales.
  • Negative surprises in expenses or profit decreases can result in money being tapped illegally.
  • Sluggish collections can hide embezzlement.
  • Employees who don’t take vacations or time off.
  • Employees who live a surprising, extravagant lifestyle.
  • Good managers walk the floor twice a day or make unannounced spot visits – be very wary of employees who resent such visits. Count on hidden problems.

Risk management: stop doing stupid things, start doing smart things for the mission.”

-Michael Piazza

Policies to prevent embezzlement

In general, establish an internal audit system and divide responsibilities. Yes, segregate all accounting duties. At each financial stage – whether incoming or outgoing – scrutinize all procedures. It’s imperative that you stay current in finance technology.

Here are 21 basic policies:

  1. Use a system that prohibits alteration of checks. Make certain checks are countersigned by two responsible employees. (Do not allow signature stamps using the same names as the check signers.) Better yet, pay bills online.
  2. Limit the dollar amount on checks. (It’s better if you authorize checks.)
  3. Make certain a person – other than a check-signer – prepares payments.
  4. Originals or copies of invoices and checks, including voided documents, are filed in numerical order.
  5. Prohibit anyone other than the principal – you – to endorse checks for credit.
  6. Determine who will receive checks and cash while designating someone else to record incoming funds, and appoint another person to take money to the bank daily.
  7. Bank reconciliations are not handled by the same personnel who handle cash receipts and cash disbursements. Preferably, review bank statements online.
  8. Regularly, at least once a month, mail statements.
  9. Prevent wadding by examining payroll records. Monitor payroll tax records.
  10. Conduct unannounced, spot audits.
  11. Designate different employees for ordering supplies, receiving them, and for paying them.
  12. More than one person should sign petty cash vouchers. Receipts should be numbered and attached, and filed numerically. Audit the cash drawer daily.
  13. Set an example by never borrowing from the cash box.
  14. Make sure the same employee who makes credit sales or loans does not write off bad debts.
  15. Back up records on a daily basis. Do not allow the same person who handles accounting do any backups.
  16. If you have a payroll person, ensure the payroll data is accessible to you.
  17. To prevent unauthorized raises or other undesired payments to employees, audit payroll records at least once a quarter.
  18. Lock up unused checks. Verify all checks and check numbers, including voided checks.
  19. Take inventory once or twice per year.
  20. Bond any bookkeepers or office managers. A good insurance agent will advise you. Make certain to follow all financial-control guidelines to avoid problems with the bonding company should an embezzlement occur.
  21. Have your cash and accounts audited each year by an outside accountant.

Finally, listen to your instincts. Again, be on the lookout for turf-minded employees. If you suspect embezzlement, investigate and run to the police. Don’t hesitate.

From the Coach’s Corner, here are special editor’s picks for related resource links:

Primer for Best Practices in Preparing Financial Statements  A good financial system is vital for your business. Not only will a properly prepared financial statement tell you what’s transpired in your business, it will give you a snapshot regarding your future.  Measurement of cash flow is paramount.

Accounting / Finance – Why and How to Determine Your Break-Even Point  Uncertainty can kill hope in business. Best practices in management mean having the right information to alleviate uncertainty in business. For that you need the right tools. One important tool – know your break-even point (BEP). A BEP analysis should be an integral part of your financial planning.

Finance Checklist for Strategic Planning, Growth — Strategic planning in finance for growth means avoiding trendy fads. Instead, it requires an ongoing down-to-earth approach in order to create value. Here are seven steps.

For Maximum Business Tax Savings, Year-Round Strategies Are Vital — Many business owners find they can plan their futures, operate their businesses more efficiently year-round, and take maximum advantage of tax savings when they file their returns. Ask your tax advisor about these 9 strategies.

You Can Creatively Manage Your Cash Flow 7 Ways — If you’re taking the pulse of your business, of course, the first thing to consider is your cash flow. If your cash flow is poor, you feel poor because you can’t pay the bills nor can you use money for what you’d like to do. Your image can also suffer with vendors or with customers, if you don’t manage your cash flow.

Plagued by Chargebacks? 5 Ways to Fight Back — Increasingly, merchants are being victimized by chargebacks in illicit of behavior credit-cardholders. To avert being victimized by such fraud, here are five key steps.

Keys to Protect Yourself from Skyrocketing Trend – Tax Identity Theft — Tax identity theft is increasingly victimizing Americans, according to the Internal Revenue Service. As many as 1.5 million Americans were hit by tax-refund fraud according to IRS Special Agent Kenneth Hines in a 2014 published report (Feds prosecute tax-fraud cases).

The average Joe should be just as concerned about embezzlement, even more so, because it’s so easy to do. All you have to do is be trustworthy to do it.”

-Peter Henning

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.





Photo courtesy of chanpipat at www.freedigitalphotos.net

Seattle business consultant Terry Corbell provides high-performance management services and strategies.