Thursday, September 23, 2010

Embezzlement: It Can Happen to You

What do Hendrick Health System, Cary Services, Pee Wee Jets Pop Warner Football Team and KGNZ Radio have in common? They are all in Abilene, Texas. They all have budgets (granted, they are very different sized budgets). And they all experienced embezzlement by trusted staff members in the last couple of years. You may think it can’t happen to you.

There are many ways to commit fraud. In the examples noted above, one group created an invoice conspiracy. Another ran herself two paychecks every pay period and used the company credit card for personal use. The next set used the group’s debit card for personal expenses and wrote checks to themselves. And finally, the accused is said to have forged the boss’s signature and stolen cash donations. Other methods include perpetrators creating fake vendor accounts, fraudulently authorizing overtime pay for themselves, inflating travel reimbursements, and even creating fake employees who happen to live at their addresses. Do not be lulled into believing your annual audit will find it. It probably won’t.

However, there are some things you can do to discourage it:

>> Check Backgrounds: Reference checks, credit checks and criminal background checks can uncover issues that could save you money if you take the time to do them before you hire.

>> Separate Duties: If you have the same person writing checks and reconciling bank statements or using the company credit card and reconciling those statements, you are at high risk for fraudulent activities. Cross train staff and shuffle responsibilities regularly. “Bookkeeper” and “Office Manager” are the most prevalent job titles of people convicted of embezzlement. No one person should be in charge of everything. While collusion is still a possibility, it’s much harder than just writing yourself a check.

>> Time Off: Many embezzlers appear to be dedicated employees who never take time off. Require vacations and time off as a matter of policy. Then make sure that someone else covers that task. Having a responsibility on pause during these planned departures can protect the embezzler. She may be floating happily at the lake (on your dime), confident that her job is too complicated for anyone else to take on in her absence.

>>    Require Multiple Signatures: This includes both checks and petty cash documents. Each signatory should verify the backup document independently. If one signature is just a rubber stamp of the first, internal control has been lost.

>> Audit by Surprise: Embezzling is a complicated business. To be very good at it, the perpetrators have to be very organized and intelligent. It would be easy for such a person to prepare for an annual audit done with a week’s notice. Conduct unannounced audits at least quarterly.

In a study by Marquet International, Ltd. (, the average duration of fraud schemes was 4.5 years. In the local examples, the average duration was 3.5 years. These are not spur-of-the-moment decisions or one-time occurrences. No manager wants to find that his or her trusted bookkeeper, office manager, or accountant violated their trust and pilfered their livelihood. The keys to ensuring this doesn’t happen to you are prevention, policies, and vigilance.

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