BANKING & FINANCE: Is there an embezzler in your company?

There’s little more disheartening than having to inform a business owner that he or she has been the victim of embezzlement. Feelings of disbelief, shock, embarrassment and anger follow, and can be overwhelming.

Embezzlement is as much an issue of trust as it is about financial loss. Embezzlers typically hold a position of confidence within an organization. They are senior managers, controllers, purchasing agents or cashiers. It’s through their position that they are able to access and steal money or property. Such actions are violations of the employer/employee relationship and can have a tremendous impact on the success or failure of the affected business.

As a Certified Fraud Examiner, I have witnessed the devastating toll embezzlement can take on an employer. I have observed numerous cases, including the following:

• A long-time friend and employee of a business owner embezzled nearly $3 million over a three-year period while the owner was recovering from a life-threatening illness.

• A religious organization promoted an employee to management. Over the next 10 months, that individual wrote company checks to pay for personal expenses totaling $100,000.

• A devout family man with 13 children started a successful business from scratch. Within one year, receipt and disbursement fraud committed by five employees nearly wiped the business out.

• A local booster club, created to raise funds for junior athletics, was embezzled of $10,000 by its president and secretary, who just happened to be husband and wife.

• A minority stockholder in a corporation learned that the majority stockholder had skimmed $150,000 off the company’s receipts, using the funds for lavish vacations and an extensive renovation of his personal residence.

These are just a few of the embezzlements that have been discovered. What about those that are taking place undetected? Is there an embezzler in your organization? Are you sure?

Generally, embezzlement begins on a small scale with an employee trying to satisfy a financial need linked to their personal life. Divorce, college expenses, high medical bills and addictions such as drugs, alcohol or gambling can motivate the theft. If the employee’s actions go undetected, the embezzlement becomes bolder, increasing in dollar amount and frequency.

Typically, the first fruit of embezzlement is the purchase of a new car. As the embezzlements increase, more extravagant purchases are made and include recreational equipment, extensive home renovations, boats and even second homes.

While detecting embezzlement can be difficult, it can be prevented by implementing strong internal controls. Where do you start?

The information contained on checks and monthly bank statements can provide clues to help you determine if embezzlement is occurring within your organization. While this sounds simple, it may not be. Often the embezzler is the employee responsible for handling the monthly bank reconciliations. He or she may be the first to receive monthly statements.

To prevent this scenario, some businesses have begun to take more aggressive measures. Bank statements are mailed directly to the homes of the owner, chief executive officer, or to the offices of board members who sit on the finance committee.

When looking for signs of embezzlement, the following should be viewed as red flags:

• Vendors listing a post office box as their remit-to address. Although this can be legitimate, it is also a common practice of embezzlers and requires further scrutiny. When reviewing invoices supporting these checks, you may want to track the accompanying telephone number. If the telephone number is missing, unlisted, a residential number or always answered by a machine, further investigation is required.

• Vendors who have a billing address matching an employee’s address. Computer reports sorted by address can determine whether account payable addresses match payroll addresses. A similar sort can be conducted with telephone numbers.

• Out-of-sequence checks appearing on bank statements. In an effort to avoid detection, embezzlers may use higher numbered checks, often from check stock stored in sealed boxes.

• Suspicious or dual endorsements. Many times, embezzlers will fraudulently endorse vendor checks to themselves.

• Use of a signature stamp. Tracking the use of a signature stamp is easier if the organization’s use of such a stamp is the procedural exception, rather that the rule.

• Checks issued to unfamiliar or unapproved vendors.

While there may be a reasonable explanation, these checks should be investigated all the way up to their source documents (such as purchase orders.) It’s important to note that embezzlers often use vendor names that are variant spellings of well-known companies, hoping that related invoices will receive less scrutiny than invoices listing names of up-start vendors.

• Missing cancelled checks. All cancelled checks should be enclosed with the bank statement. Any missing checks should be traced.

• Checks written to vendors for amounts that continually fall below the “approval” threshold. For example, if an organization requires senior management approval for invoices over $1,000, pay close attention to checks written frequently to the same vendor in amounts just below $1,000.

While there are no foolproof methods for detecting and preventing fraud within an organization, embezzlers often leave clues. Many of those clues may be contained in your bank statements and checks. If something doesn’t feel right, it probably isn’t.

A diligent review of all checks may lead you to an unwelcome discovery, but it will also provide you with the comfort of knowing that you’ve taken effective action to detect and possibly prevent a future fraud from occurring within your organization.

David Wells is a Certified Public Accountant and a Certified Fraud Examiner within Plante & Moran’s Special Services Group. Most of his fraud assignments involve investigating suspected embezzlers within organizations. This article was printed with permission from Plante & Moran, LLP. BIZNEWS