Investigating Embezzlement

Determining whether or not to trust someone, particularly in the workplace, can be complicated. As Ernest Hemingway once said “The best way to find out if you can trust somebody is to trust them.”

Although this concept sounds genuine in theory, forensic accountants have found that the practice of an employer instilling too much trust in an employee can lead to manipulation. It also can lead to embezzlement.


Embezzlement, a crime rooted in trust, is defined by The Legal Dictionary as “The theft, misappropriation, or conversion of monies placed in one’s trust, or which belong to an employer.” It is also defined by California Penal Code section §503 (which defines embezzlement as the fraudulent appropriation of property by a person to whom it has been entrusted).

If you are faced with an embezzlement investigation, the following may help you work with a forensic accountant in order to understand some of the practical procedures utilized and the appropriate documents to request.

LEARN THE ACCOUNTING PROTOCOL
Understand the accounting of the company.  It is important to gain a general understanding of how a company’s accounting is supposed to operate versus how it actually operates. In an embezzlement investigation, detecting the differences between the two operations is critical. In order to identify if differences are present, you must obtain documents highlighting the policies and procedures accepted by the business. This data can be outlined in handbooks, policies and procedures manuals, and through conducting interviews with relevant staff members. Interviews with staff should include discussions about the day to day activities and how they might depart from the governing policies of the company. Awareness of the company’s prescribed financial processes allows the forensic accountant to discover transactions that deviate from the protocol, when performing a detailed analysis.  It should be noted, however, that variances from the prescribed processes may not mean that fraud occurred.

GET THE RECORDS
Gain access to the company’s accounting records. In order to conduct a detailed analysis, determine how the accounting records are maintained and request the relevant electronic files. For example, if the business utilizes QuickBooks, requesting the native QuickBooks files is fundamental. QuickBooks allows the forensic accountant to analyze individual transactions, identify various customer vendors and download pertinent financial statement summaries. Exporting large amounts of QuickBooks data into Excel or other analytical platforms, allows the forensic accountant to organize the information in various presentations. Analyzing the data in this manner can highlight fraudulent patterns that may not be obvious when simply viewing in QuickBooks.

BANK INFORMATION
Request company banking records. Specifically, obtain the bank statements, cancelled check copies and deposit slips directly from the banking institution. Having access to these documents allows the forensic accountant to perform a line by line reconciliation between the banking records and the accounting records. This reconciliation process can either verify that the accounting records are being accurately recorded, or can expose fraud if the two records reveal contrasting data.

For example, the date, amount and payee details on cancelled checks should match what has been entered into the accounting records.  In many embezzlement cases, a check was actually issued to someone other than who was entered in the accounting records. Analyzing check copies of the business, particularly details on the back of the check, can reveal additional information about where funds were deposited. In some cases, the individual who endorsed the check and the account it was deposited into may be different from the payee identified on the front of the check. If the suspect has signing authority over the business account, these instances are especially likely.

CONNECT THE DOTS
Once the embezzlement scheme is identified, performing a line by line analysis of the general ledger and reconciling the information to the suspect’s bank accounts can reveal disguised transactions. For example, the General Ledger may indicate a wire transfer was paid to a third party vendor, yet a transfer for the same amount on the same date was deposited into the suspect’s bank account. Furthermore, if you have the ability to do so, requesting the banking records of the alleged fraud perpetrator can reveal the final destination of the diverted funds. Tracing the money through these accounts is especially fruitful if the investigation requires quantifying damages.

Unfortunately, there is no universal approach to an embezzlement investigation. Because each case will vary, the documents needed to perform the analyses will vary as well. However, the methods listed here should serve as a helpful guide.