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Embezzlement — Basics on how Trusted Employees Steal From Companies

by Mark J. O'Donnell

Embezzlement happens when a person is trusted with possession or control of property required by their employment that they unlawfully appropriate for personal use.

Here are a few observations.

-The property is typically but not always cash. No matter the property, the embezzler must have the means to convert it to cash.

-The schemes commonly relate to inventory, customer payments, vendor payments, payroll, credit card charges, petty cash funds, or bank transfers.
-Embezzlement frequently starts small and increases over time, which may be years. They may use more than one scheme.

-There is no predictable profile for a person willing and able to embezzle from you. Still, they are often in a difficult financial position, motivated by hidden behavior (e.g., gambling, substance abuse, infidelity) or a lifestyle beyond their income, and are typically older than 40. It’s not unusual to read of embezzlements of more than $100,000.

-Finally, the company’s financial condition may not impact the embezzler. They appear to be influenced by the opportunity more than the company’s balance sheet.

One of the most common situations vulnerable to embezzlement is when a business owner ‘trusts’ an internal accountant or bookkeeper, believing that the embezzler is a fair and honest person. Owners are sometimes fooled by a clean background check and appearance of loyalty. That trust is the basis for unknowingly giving away control of an asset and the responsibility to account for it; all the embezzler needs to steal. For example, when a person can sign checks and has the responsibility to account for the disbursement, they can divert cash to themselves and ‘bury it’ in the accounting records.
There are symptoms of embezzlement.

- Journal entries to cash, accounts receivable, or accounts payable.
- Missing documentation.
- Poor controls over the petty cash account.
- Unexplained work hours at unusual times.
- General defensiveness about accounting details.
- Limiting direct contact between the owner and the external CPA / tax preparer.
- Confusing answers to questions about accounting for assets or expenses.
- Refusal to delegate specific responsibilities or share accounting record access with assistants or outside accountants.

- Customers complaining about payments made not being recorded.
- Vendors complaining about overdue accounts.
- Recurring inventory shortages.
- Unusual variations in expenses.

What practical things can you do to reduce your exposure?
- Whenever possible, separate custody from accounting.
o Sign checks and payroll yourself or by an informed family member not involved in accounting.
o Require specific documents with initialed approvals by qualified nonfinancial people to accompany checks for signature.
o Use impressed accounts for emergency payments and have them independently reconciled monthly.
n Review your financial records from time to time, in particular.
o Bank account, petty cash, accounts receivable, and accounts payable reconciliations.
o Complex or unusual journal entries.
o Receipts from customers.
o Payments to vendors.
o Payroll details.
- Require all accounting personnel to take time off and have someone else fill in for these responsibilities.
- Have specific, written accounting procedures that are followed and monitored.
- Have an independent CPA review your accounting records regularly.
- Purchase ‘honesty bonds’ for all personnel with custody of or accounting for cash.

And finally, what should you do when you are concerned about embezzlement in your company? Talk to qualified professionals about your concerns. Call your CPA. Most experienced CPAs have consulted with clients about embezzlement. If not, they can refer you to someone that has. Second, call your attorney. How you proceed will impact the result of your investigation.

Mark O’Donnell, CPA, is Partner at Schmersahl Treloar & Co. He can be reached at 314.966.2727.

Submitted 147 days ago
Categories: categoryFinancial Fitness
Views: 284