Embezzlement – 21 Tips to Protect Your Nonprofit or Company Assets

FROM http://www.bizcoachinfo.com

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.

Upper management commits 18 percent of fraud, according to the Association of Certified Fraud Examiners (ACFE) in 2010. ACFE also said accounting department employees commit 29 percent of fraud.

Not convinced embezzlement is rampant?

Consider these news stories:

• Sparks office manager sentenced in 750K embezzlement case  – The $750,000 embezzlement resulting in 60 Nevada construction workers being laid off.
• Auditor praises UW’s handling of embezzlement case – It was too late, but the University of Washington Medical Center was praised for its handling of a $250,000 employee embezzlement by the state Auditor’s Office.
• Va sheriff charged with embezzlement, bribery – In Virginia, the Middlesex County Sheriff was indicted on 25 felony counts on alleged embezzlement and other charges.
• Ex-DPS accountant pleads guilty to embezzlement – In Detroit Public schools, a former accountant pleaded guilty to embezzlement and a related charge.

Yes, embezzlement can happen anywhere to anybody. Management 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. In new-employee orientation, discuss your company’s financial principles. In a businesslike manner, 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. And if invoices aren’t recorded, even salespeople can personally benefit by selling products on the black-market or Craigslist.

Actually, it doesn’t hurt for everyone to know financial procedures. As a business-performance consultant, I’ve seen this movie many times including embezzlement at a religious nonprofit, $200,000 in missing inventory at a retailer, and $250,000 in theft at a water utility.

In each case, the management solutions were financial and inventory controls, as well as training of all employees in ethics.

In the water utility situation, the budget became tight and management intended to hire me for PR crisis management to calm utility ratepayers. But I insisted on training the employees. I knew the priority was installing controls, and PR would have to come later. Fortunately, the training program resulted in improved morale, teamwork and communication. 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.

Here are the customary, potential problem areas:

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

The two key steps you should follow:

Step one. 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.

Step two. Establish an internal audit system and divide responsibilities. Yes, segregate all accounting duties. At each financial stage – whether incoming or outgoing – scrutinize all procedures.

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.