Most of us like to think that our employees would never steal and we pride ourselves on an open and honest work environment. We often think of our employees as family. But the truth is embezzlement cases are on the rise, and most are perpetrated by the people we know and trust most.
Small business owners are particularly vulnerable. According to the Association of Certified Fraud Examiners, “the median loss suffered by organizations with fewer than 100 employees was $200,000 per scheme…higher than the median loss in even the largest organizations.”
The 2012 Marquet Report on Embezzlement reported 528 major cases where at least $100,000 was misappropriated, an increase of more than 11 percent from 2011. On average, embezzlement schemes last just under five years before being detected. Forgery or unauthorized checks are the most frequently used embezzlement schemes.
Although depressed economic conditions may have led to an increase in cases in 2012, a desire to obtain and maintain a lavish lifestyle beyond the perpetrators’ legal means is most often the primary motivating factor. Statistics show that, on average, only 20 to 40 percent of companies will recover any of their losses since the embezzler does not save the money but frequently spends it on items with little or no residual value.
In a recent case of embezzlement at Southern NH University, the budget director was accused of misappropriating university funds of more than $1 million over a 14-year period. He allegedly used the funds to pay off personal debt and is reported to have told investigators: “It just started and escalated. It’s not like I have a million in the bank.” In this case, the university has been reimbursed $500,000, but businesses frequently do not have insurance that will cover these types of losses.
This is especially hard on nonprofit organizations that may be severely affected by a much smaller loss. In a recent case, a Concord cooperative preschool incurred losses of $4,600 due to the alleged embezzlement by a volunteer treasurer. That amount can be difficult to offset when the organization is already operating on a very tight budget.
Who’s Most Likely to Embezzle?
In two out of three cases the embezzler is a woman in her 40s. The reason is simple. The embezzler is frequently the bookkeeper, a position often filled by women. (The Bureau of Labor Statistics reports that in 2010, 90 percent of bookkeepers were women). The embezzler also needs a level of authority in order to perpetrate the theft, a situation frequently achieved during middle age.
The perpetrator is most often a trusted employee who has been with the company more than five years. They appear to be hard working, may take on more responsibility and work extra hours, often coming in early or staying late after all other employees have gone home. They may even refuse to take vacation. These actions, which make them appear dedicated, also provide the opportunity to commit the crime.
Be Proactive
Rather than focusing on detecting employee theft, at which point the money is already gone, small business owners should concentrate their efforts on minimizing opportunities for theft to occur. This does not need to be time consuming nor require an in-depth knowledge of accounting. Instead use common sense.
Here are some techniques to deter fraud:
• Receive your bank statement directly from the bank, before anyone else, and open it. You don’t even have to look at it, although it wouldn’t hurt, but the fact your employees know you can look at it will discourage them from writing a check to themselves, or transferring money from your account into their own.
• Insist on receiving monthly bank account reconciliations from your bookkeeper. If you can’t get this report in a timely fashion, you should ask questions since regular reconciliations do not require a lot of effort or time.
• When you receive the bank account reconciliation, pay particular attention to the items used to make the bank balance match the book balance. These items, such as deposits in transit, can be used to hide shortages in the account.
• Be wary of transfers between bank accounts. Business owners are frequently careful with their checkbook but allow employees unlimited ability to transfer money between accounts. If you use more than one bank account, contact your bank to set up security procedures for transfers. The bank can make often this a two-step process, whereby one employee must initiate the transaction and another authorizes it. This could prevent a large transfer from your account into the account of an employee.
• Don’t leave large cash balances in a bank account that employees can access. Limit the balance in your operating account to an amount you can afford to lose. Keep the rest in an account with restricted access.
• Control the use of credit cards. If possible, avoid using them at all. This may seem impossible, but many times a billing account can be set up with a vendor so that credit cards are not required. If you can’t avoid using credit cards, follow the same advice given for your bank account. Receive the statement directly and open it.
• Implement a vendor approval process. Many frauds are perpetrated using fictitious vendor accounts set up by dishonest employees. The fictitious vendor is really just a name in your accounting system that looks like a legitimate vendor. Checks can be made payable to this vendor, which can be hard to detect since the check is buried amongst legitimate vendor invoices. The best solution is to prevent vendors from being set up in the system by implementing an approval process. Most accounting systems can restrict employee access to the vendor file.
• Review your payroll reports. If you can’t review them weekly, then review them monthly, but be sure to vary the timing so that the review is unexpected. Look for fake employees, extra bonus checks, wages in excess of agreed pay rates and excessive overtime.
• Send out customer statements. Let your customers be part of your internal controls. They will appreciate the statements so they know that their records agree with yours, and if they find a discrepancy, they will contact you. It may be a simple error or it could help you identify an employee who is stealing accounts receivable checks.
Most importantly, do not be deterred. Remember, it’s your company. If your employee talks in circles, answers your questions with confusing and complex responses or makes you feel like the information is too difficult for you to understand, then you have a problem. Financial information is basic math, and your bookkeeper should be trying to help you understand the information. If you’re not getting the answers you want, then your employee may have something to hide.
Leslie Walker is a CPA and a director with the accounting firm of Mason + Rich PA in Concord. She can be reached at 603-224-2000 or lwalker@masonrich.com.