If The CEO Does It All, He Can Take It All....Embezzlement in Business

Certain themes occur in client situations with astonishing regularity: Embezzlement, Disappearing Inventory, and Fraudulent Financial Statements.

Embezzlement: Embezzlement happens more frequently in organizations where one staff member has access to, or control over, many business activities like writing checks, making deposits, balancing the monthly bank statement, and writing payroll checks.

An example would be Donna Getall, who worked at Loose Plumbing for 25 years and eventually became CEO. During the three-year period she was in control, her boss, Ralph Lazy, let Donna completely control the flow of cash and funds, the bank statements and the filing of tax returns.

As embezzlers are prone to do, Donna decided to start paying herself amounts greatly in excess of her authorized salary. She also paid amounts to her husband who did not even work at the company, documenting the checks as subcontractor expenses. Donna also drew checks for large amounts for nonexistent office expenditures, and deposited checks payable to Loose Plumbing into a new account she had set up for her own benefit. Perhaps the worst injury was filing the tax returns without paying the tax due, while hiding that fact from Ralph.

The fact patterns are many and varied, but the basic weakness that permits the embezzler to begin taking funds from the business is the inability or failure of the business owners to have implemented a fraud deterrence program.

Disappearing Inventory: Allgood Distributions, Inc. (Allgood) was a national distributor of medical products. Sly Slink (Sly) was hired as the CEO of the organization. Sly was hired at a mediocre salary and soon decided that he was over-worked and under paid. Sly recruited his golfing buddy, Terry Taker (Terry) to fill the position of warehouse manager.

During their Saturday golf outings, Sly and Terry complained to each other about how much money Mr. Allgood was earning from their hard work. Mr. Allgood highly rewarded the sales team but would not increase the compensation of Sly or Terry.

Being such good friends, Sly and Terry discussed how to get "just what was due them" for all their hard work. They set up their own company called A.D. Inc. Sly was in charge of approving all new customers, so when a new customer called, Sly made them a customer of A.D., Inc.

Sly would process the paperwork for the orders of the A.D. customers and Terry would ship the products from the inventory of Allgood. When the check was received, Sly would deposit the check into the A.D. account and he and Terry would split the money.

Since Sly and Terry controlled all accounting, inventory and shipping processes, the theft remained undetected until Sly quit his job for a higher paying position and a customer of A.D. called to complain about a product.

Limiting Your Exposure to Embezzlement:  Embezzlement is like an invisible menace, capable of taking an incredible toll on a business's resources, morale and public image. It's one of those "it can't happen to me" crimes that can set you back for a long time if you don't protect yourself.

In its broadest sense, embezzlement includes not only the stealing of funds by employees, but also using company property for personal use without permission. To be honest, it makes no difference whether your business is large or small - every establishment must put into place systems for preventing and detecting embezzlement. Even well-trusted employees may be a threat to the financial security of your business. Long-term employees might find themselves in a difficult financial situation that pressures them to do something they normally wouldn't consider. Embezzlers are, after all, successful because they're the ones who everyone thought could be trusted.

From a logical point of view, embezzlement almost makes sense. Perpetrators typically aren't caught. When they are, they're often not punished. While the courts generally mandate repayment, it often never happens. Embezzlers may endure a dose of public humiliation if the story appears in the newspapers. But many times even the shame does not take place since the organization wants to hush up the incident to avoid looking bad in the community. For some people, this litany of weak disincentives makes a compelling case to go ahead with embezzling.

In fact, fraud specialists estimate that less than ten percent of embezzlement cases are ever reported. Yet, they also suggest that organizations lose more than $600 billion a year to such activity. This is an enormous problem that rarely draws the public attention of shoplifting or burglary.

Where are you vulnerable? Take a long and objective look at your organizational structure and see where funds could possibly disappear without being obvious. For just a moment, think like an embezzler. Look at both personnel and procedures. If you're not sure how to do this, discuss it with a forensic accountant.

Who are your employees? Do you have someone at your business who's been telling other workers about his/her tales of financial woe? Many embezzlement cases invol^ve long-term employees who never gave any reason for suspicion. If you always think the very best of people, maybe you should have someone else check out your new hires. And always call references and listen for the unspoken warnings that some recommendations carry.

How do you know it's not happening as you read this article? Consider whether you're currently losing money to an internal embezzler. This removes your planning from the theoretical to the practical framework. Engage a forensic accountant to match up the last few bank statements with checks actually written. Look at the last few months’ deposits for anything suspicious. Examine the list of accounts for names that are unfamiliar. In addition, look for non-standard entries in your bookkeeping records: adjustments, larger-than-normal credits, and extra-ordinary expenses. Ask your forensic accountant for help in highlighting areas to review. Don't become a statistic. Now is the time to have a fraud deterrence plan put into place to safeguard your company's assets.