To Catch a Thief in Your Midst: Preventing Embezzlement Schemes

June 2008

IN THIS ISSUE

— In Employees We Trust? The Effects of Embezzlement
— Means, Motive and Opportunity: Red Flags of Embezzlement Schemes
— In the next issue

GREETINGS!

Welcome to the June 2008 edition of our newsletter. In this issue, we’ll look closely at various types of embezzlement schemes, how to spot the red flags of such abuses, and create a culture that inhibits these costly infractions from happening in the future.

IN EMPLOYEES WE TRUST? THE EFFECTS OF EMBEZZLEMENT

Much has been made of the ethical makeups of top executives at large companies, some of whom reaped fortunes in salary and stock-based compensation by inflating earnings and using other machinations to set their company up for a spectacular fall. In these cases, much has been justifiably said of the employees whose pensions and other investments in “their company” were squandered.

Yet rank and file employees can do significant damage to a company’s bottom line, as well as their corporate culture. Whether it’s a cashier skimming a few dollars into her pocket every time a pair of sneakers is sold, or an employee setting up a fictitious vendor to “earn” kickbacks from his own department, the results are serious: some estimates claim that U.S. businesses lose $400 billion to various types of embezzlement. Next, we’ll discuss how to detect this dangerous practice in its various forms.

MEANS, MOTIVE AND OPPORTUNITY: RED FLAGS OF EMBEZZLEMENT SCHEMES

Although there are exceptions every paradigm, the typical employee is not motivated to commit fraud such as embezzlement. Yet when various stresses enter a person’s life, whether the financial and emotional pressures of a divorce, sending kids to college, or rising housing payments, the seeds of corrupt behavior can be planted. Suddenly unthinkable acts seem not only possible but, to some, necessary as a means for getting out of a tough spot.

Of course, to commit a crime, an employee must be able to pull off the caper. This means a cashier needs to be able to access the register easily, or a supervisor needs to be able to enter vendors into the accounts receivable system, whether real service providers or ones simply created to siphon company funds.

The means of prevention and detection vary with each of the differing embezzlement schemes, but for the examples here several rules apply. Most notably, segregation of duties for accounting and management personnel is key, so that no one individual has to much responsibility — and thus, too much opportunity for fraud. Making sure department heads must approve purchases with accounting personnel and even a third party will decrease the possibility of collusion to commit a fraud.

With respect to a cashier, making sure that each cashier must enter a code to show who was using which register at a given time is a good practice, as well as installing cameras near the register banks, to give the impression — perceived or real — that employees are being overseen at all times.

Finally, it is always a good preemptive practice to perform thorough background screening on potential hires, especially those with access to cash as part of their duties. Indicators of significant financial pressures, a history of personal financial mismanagement, and any past citations for misconduct or theft are reasonable factors for denying employment in the first place.

IN THE NEXT ISSUE

In our July issue, we’ll look at the role of whistle blowers in detecting fraud and malfeasance, and also examine the evolving protections meant to inhibit retribution.