Embezzlement: theft or misappropriation of funds placed in one’s trust or belonging to one’s employer.
Whenever I hear about employee embezzlement, my heart goes out to the business owners that not only have suffered a financial loss, but usually feel extremely hurt from the breach of trust of a valued employee.
If you are a car dealer, small business owner or executive, here are some things you can implement now to help minimize the potential for a fraud to occur in your organization.
There is usually a lack of segregation of duties in closely held organizations because the operations are just not big enough or the margins are just too tight to justify adequate internal controls and segregation of duties. If you have one person with access to your bank account, access to posting transactions to your general ledger, access to making general journal entries to your accounting system, approving vendors, making credit decisions, reconciling your bank accounts and signing your operating and payroll checks, you are more susceptible to fraud and employee theft than a large corporation with different people and/or different departments performing these functions.
Most people in a position of trust are honest and wouldn’t steal even if they had the opportunity, but unfortunately, it only takes one instance to cost hundreds of thousands of dollars in losses. The average embezzlement lasts over two years before it is discovered and results in a loss of over $200,000.
If your office manager or controller is your chief accounting officer and also reconciles your bank accounts, you need to have your bank accounts independently reconciled once or twice a year at random by your CPA or a CFE. It’s easy to post a transaction and hold a reconciling item on the bank reconciliation for an indefinite period of time to cover up an impropriety if there is no one independently verifying or looking at the reconciliation from time to time.
Run a printout of payments to vendors sorted by amount, with the sort being from the largest to the smallest amount. Verify with management and other key employees the vendors you don’t recognize. Make sure you know what the vendor does for you and that they are a legitimate vendor. Pull invoices for some of the vendors you don’t know and look at them. If you don’t sign accounts payable checks on a monthly basis, take time to sign them 3 or 4 times per year and flip through each individual check and the attached invoices and look for anything that looks unusual. Research the payments and/or vendors you’re not sure about. Setting up fake vendors and making payments to fake vendors is a common scheme if one person can set up vendors, approve invoices, sign checks and mail them.
Read and analyze your monthly financial statements in detail. Look for gross margin percentages that are out of whack, expenses that are way too high, and balance sheet accounts that look out of the ordinary. Compare monthly financials side by side and look for trends and out of place items. Research anything unusual to resolution. As a CPA, I always tell business owners the financial statements tell a story, and you need to be able to interpret the story they are trying to tell you. If something doesn’t look right, it probably isn’t right. If you need assistance analyzing or interpreting your financial statements, don’t hesitate to seek professional assistance. If the financials are telling a story you never hear, what good are they?
Compare the gross wages on your quarterly payroll tax reports to the total payroll expense on your financial statements and make sure they agree. Know that accrued payroll may be a reconciling item to see if the wages per your financials agree with the wages per your quarterly payroll tax returns. Payroll expense that is reported on the financials but not reported as wages on payroll tax returns or on W2s is one way to commit fraud, especially if a fraudster has access to approving, issuing and signing payroll checks.
Consider setting up a fraud hotline so employees can give an anonymous tip anytime they suspect fraud in the organization. They may not rat out a fellow employee if they have to sit down with a supervisor, high level executive or the owner. If they have an easy way to make an anonymous tip, however, they are more likely to report fraud and abuse. There are companies out there that provide this service for a monthly fee, and it may be well worth the money to implement a fraud hotline.
Consider adding an anti-fraud policy to your employee documents, and have every employee sign it as they are employed, and have current employees sign it and keep it in their employee file. There are a number of sources to get a sample anti-fraud policy, including fraud examiners and probably labor attorneys. This will reinforce in writing that you want a fraud free work environment and you expect honesty and integrity from your employees and also expect employees to report suspicious or fraudulent activity.
Finally, it is important for business owners and key executives to set the tone at the top. If you always bend the rules or operate in the gray area every chance you get, your employees see that and figure it’s okay for them to do that, too, since that is the tone at the top. If you are unethical and lack integrity, don’t expect your employees to have more integrity and be more ethical than the example you set.
For more information contact Greg DeFoor, CPA, CFE, at 678-919-2230 or firstname.lastname@example.org.