Employee Embezzlement Prevention

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ST. LOUIS • Rebecca Wagstaff pleaded guilty in federal court here Wednesday to a felony mail fraud charge and admitted stealing more than $100,000 from her employer.

Wagstaff, 58, of Arnold, was the office manager of a west St. Louis County optometrist and wrote $102,580 worth of company checks over roughly five years to pay her credit card bill, Assistant U.S. Attorney Mike Reap said in court. (source)

That just came up and thought we would do our annual Embezzlement Prevention Reminder: The U.S. Federal Bureau of Investigation embezzlement is the unlawful misappropriation by an offender to his/her own use or purpose of money, property, or some other thing of value entrusted to his/her care, custody, or control. This includes, kickbacks, payroosl fraud, false reimbursement claims..

It is a serious problem in the United States, estimates embezzlement related losses are now up to about $600 billion dollars per year.

Only 2 things are needed for embezzlement

  1. Volunteer or employee with a motive and opportunity to steal
  2. Loose or non-existent financial controls.

An interesting post by Anquillare, Ruocco, Traester and Company (CPA’s) on Embezzlement Prevention and a few other recommendation on Embezzlement Prevention

Have Good internal controls

 

Photo: www.thewealthydentist.com: Survey Results; The majority of dentists report having been embezzled. Fifty-nine percent of dentists in our poll responded, "Yes, I have discovered theft in my practice." Only 41% replied, "I'm not sure: I have never been able to prove an embezzlement took place."

Adopt a policy of mandatory vacations and mandatory duty rotations.  It is not uncommon for the embezzler to interfere with the customary workflow to effect the embezzlement.  However, if your policies require the embezzler to give up control of his/her work, he/she will recognize that the fraudulent scheme might be more easily detected, and thus be detoured from committing the illegal act.

Establish a Culture of Transparency and Responsibility: Where others are activiley monitoring each other- For bank accounts, organizations should adopt and maintain a system of checks and balances. At a minimum, a person other than the person writing checks and making deposits should regularly receive, review, and reconcile the bank statements and promptly ask questions if any irregularities appear

Create and foll0w Internal Financial Policies: Next, an organization should establish written internal financial policies and practice them on a consistent basis.  Everyone handling money should be accountable and know exactly what is expected of them.

  • Employee handbook with up to date job descriptions, code of conducts

Establish a hotline for whistleblowers and train employees how and when to use it.  While most hotline calls do not trigger fraud investigations, one of the best ways to detect fraudulent activity is through other employees.  Let employees know about the organization’s ethics from the top down.  Explain that any unethical conduct imposes costs on everyone.  Employees who believe that they are being monitored are less likely to steal.

Don’t hire thieves. This means that if you intend to place an individual in a position of trust, you should conduct a background check.  The typical background check involves employment and education verifications, reference checks, criminal conviction checks, drug screenings and a credit check.  You may need the candidate’s consent prior to conducting some components of your background check, so you should seek the advice of a qualified attorney.

Conduct periodic surprise internal audits. These are most effective after identifying high risk areas and designing procedures to achieve the desired objectives.  It is not uncommon for management to engage a qualified CPA to help them plan the audits and perform the procedures.  It is important to note that simply knowing that the organization has a policy of conducting surprise internal audits can act as a deterrent to the would-be embezzler.

Be mindful of  motivating factors that could drive one to steal.  Greed may not always be the motivator.  Recognizing some conditions in which a employee might steal:

  1. Family drug, alcohol or gambling problem
  2. Deteriorating health of a family member
  3. Death of a family member
  4. Extramarital affair
  5. The assumption of too much debt, living beyond their means
  6. Embarrassment because of lack of material possessions, The outward desire to be accepted by an affluent group
  7. Untimely, unbalanced and unorganized financial reports, accounts, missing documents, losses of company funds, unauthorized charges
  8. Refusal to take vacations and works long hours

Characteristics of the typical embezzler.

  • The amount of the embezzlement is generally larger for long term employees.
  • While over two-thirds of all embezzlers are between 31 and 50 years old, those in their 60s caused the largest loss per incident.
  • The higher the embezzler’s education level, the larger the loss per incident.
  • Over 60 percent of all embezzlers were men.
  • About 75 percent of all embezzlers work in accounting, executive, sales, or customer service positions.
  • 40% of fraudulent cases involved collusion with others.

Don’t rely on your CPA/Accountant to detect embezzlement during his/her normal end-of-year engagement.  Only about 5% of all fraud is detected by external auditors.  If you want your CPA to help improve the chances that fraud will be detected if it exists, consider engaging him/her to design and perform custom tailored procedures

Embezzlement prevention and detection is not an exact science.  All your best efforts may not prevent it and if it occurs it might not be detected for years!  Nevertheless, it would be imprudent to rely on your instincts or hope that it will never happen to your organization.  And, although you may not have the resources of a large business, there are indeed certain important yet inexpensive steps you can take to reduce your risks.

Resources

Embezzlement: Everything You Need to Know “ by Stephen Linker

FindLaw.com article “Embezzlement Warning Signs

Embezzlement Prevention and Detection” by Vincent Ruocco, LLC, CPA

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