Embezzlement by employees can take many forms -- from the simple use of a company credit card to buy inexpensive personal items to complex check forging schemes that result in massive losses. Take a look at these court cases, which illustrate some of the ways employers can be defrauded:
A 34-year-old man pleaded guilty to embezzlement in Vermont and agreed to repay more than $40,000 in losses to his former employer, a shopping mall operator. According to court filings in the case, the man obtained the money by taking cash from bank deposits, stealing gift certificates, using mall credit accounts for the purchase of personal items and issuing checks to himself from the mall marketing checking account.
A government employee in Michigan was sentenced to up to 10 years in prison after stealing more than $180,000 on the job. While working at the state's Department of Environmental Quality, the 39-year-old man diverted money into his personal bank account that was sent by businesses for permit fees. The embezzlement continued for several months until an internal audit uncovered discrepancies.
A 38-year-old Massachusetts office manager pleaded guilty to embezzling more than $1.1 million from her employer, a drywall company. The woman had three previous embezzlement arrests and had served time in jail. According to court records, however, the employer did not conduct a criminal background check before hiring her. She wrote more than 400 company checks to herself and other businesses that she owed money to personally. She entered the name of a legitimate payee in the company's computer database, so it looked like the checks were going toward business expenses.
The former finance director of the Arkansas Symphony Orchestra pleaded guilty to stealing $160,000 from the organization. The 48-year-old man misused orchestra credit cards, mostly for small expenses such as car repairs, gas, groceries and pet supplies. He also got company cell phones for himself and family members but never reimbursed the employer and collected a salary advance but never repaid it
These are just a few of the countless cases that wind up in courtrooms nationwide. When a company falls victim to embezzlement, the perpetrator is often an unlikely suspect. Fortunately, there are warning signs and ways to detect and prevent internal theft. Here are some steps your company can take to help avoid becoming another embezzlement statistic:
Where there's Smoke, there May Be Fire
Some traits sometimes exhibited by those convicted of embezzlement include:
Abrupt shifts in work schedules.
Declining to take vacations.
Sudden changes in lifestyle such as buying a larger home and driving a more expensive car.
Problems with drug abuse, alcoholism or gambling.
On their own, these behavioral changes may be explainable. But take note if they arise in conjunction with financial abnormalities.
Listen to Employees. They May Know About Colleagues' Fraudulent Behavior
Embezzlement usually occurs when motive combines with opportunity. In the workplace, if an employee is disgruntled or has financial problems, fellow staff members are often the first to hear about it. Having a system in place for colleagues to report suspicious behavior often makes the difference between embezzlement going undetected and having the information reach the desks of upper management.
One of the most useful and cost-effective internal controls is a hotline where employees can immediately report concerns or suspicious activity with a degree of anonymity. The Association of Certified Fraud Examiners found that workplaces with an employee hotline were able to detect fraud an average of nine months earlier than those that did not have a reporting system in place.
When a hotline is part of a system of internal controls, concerns can be investigated quietly and without necessarily confronting employees who may be innocent of wrongdoing. If circumstances are thoroughly investigated and suspicions found to be unwarranted, the employees involved may not have to know about them. Keep in mind that false accusations can lead to discrimination charges and other legal actions.
Embezzlement Prevention: More Steps to Consider
Require two signatures on checks. Don’t use payroll signature stamps.
If cash deposits are made, send only trusted, long-term employees to the bank.
Check bank account statements and make sure accounts payable and accounts receivable match up. Don’t allow the employee who writes or deposits checks to balance bank statements.
Establish transaction controls for electronic fund transfers from company bank accounts.
Review credit card statements for personal charges.
Do credit and criminal background checks on employees prior to hiring them, especially those handling payroll, checks or cash. Conduct an Internet search on applicants.
Have more than one employee handle duties when it comes to payroll and handling cash and checks.
Set a good example and make workplace ethics clear.
If records are disorganized or important financial documents can’t be located, call in a forensic accountant to follow the paper trail.
Consult a Forensic Accountant
When it comes to embezzlement, it is best to err on the side of caution because detecting crimes early can save your organization considerable further losses. Many times, a convoluted paper trail makes it difficult to determine whether embezzlement has occurred.
A forensic accountant can efficiently ascertain whether fraudulent activity is underfoot at your company. Like the old saying goes, an ounce of prevention is worth a pound of cure.
About Romanchuk & Co.
Romanchuk & Co. is a boutique investment banking and advisory firm with a focused expertise within the energy and industrials sectors. We specialize in providing sell-side M&A advisory services to lower middle-market companies and their owners. Our team advises owners on the preparation and sale of their company, assists them in identifying strategic opportunities and then helps them execute upon those strategies. Through our CPA advisory practice, we provide independent business valuations, financial due diligence services, forensic accounting investigations, litigation support and restructuring advisory services.
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