Over the last few years I have written several articles for the Cascade Business News on embezzlement. A theory discussed in one article suggested that employees, given the opportunity to embezzle, and being motivated to do so, will embezzle.
Also included in that article were ways to reduce the opportunity for embezzlement by designing and implementing internal controls. Here in Central Oregon, we have seen several embezzlement cases and usually they were perpetrated due to an organization’s lack of internal controls or failure to monitor them. This of course provides the opportunity. And if that theory holds true, the eventual embezzlement will be financially painful – and always personal.
Like most CPAs, I’ve seen my share of embezzlement cases. One of these incidents affected me directly. My story begins when I was working as a CPA in Idaho. I was helping to assist a large company (over 100 employees) to install a new accounting software program. The accounting manager was a sweet older woman who had been with the company since its inception and was retiring in a month.
While getting to know her, I realized the company owner had put his full trust and faith in her; she had unlimited check-signing authority as well as control of the checkbook and accounting records. Also, she regularly reconciled the monthly bank statements. I knew this lack of internal controls created a huge opportunity for a would-be embezzler and I stated my concerns to the owner.
However, he didn’t seem worried. He then asked me to serve on the hiring committee for her replacement. After an exhaustive search, we finally we found the quintessential accounting professional with the proper accounting education and experience. A quick criminal background check came up clean, the interview went smoothly and the owner offered her the job.
Before she began work, I had the chance to explain internal controls to the owner and suggested that he should not give her all the authority (e.g., check signing) her predecessor had possessed. He said he wouldn’t. But within her first week of work, she was signing checks. When I asked the owner “why,” he told me that his latest decision was necessary to keep the company running efficiently and effectively. I asked him if he would at least allow me to reconcile the monthly bank statements; he agreed.
The accounting manager had been employed about two weeks when the end of the month rolled around. I dropped by the office to pick up the bank statement package which included returned cancelled checks. The package was on the accounting manager’s desk and, when she handed it to me it appeared to have been tampered with. She was told not to open the package beforehand so I was surprised by its appearance. I asked what had happened to it and she explained that the postman had dropped it.
I took the bank statement package to a separate office and began to reconcile it to the company’s accounting records. Quickly, I determined that something wasn’t right. Five checks that had been listed as cleared on the bank statement were not physically in the bank package. It would be a very rare occurrence if one cancelled check was missing in a case like this, but five missing checks defied all odds.
I immediately called the bank and asked them to fax me copies of the five missing checks – front and back. When the faxes arrived 20 minutes later ,it became obvious: the accounting manager was embezzling – $10,000 so far. The five checks had been used to pay off the accounting manager’s car loan, ATV loan and various credit card balances. Later that evening, I reviewed the evidence with the owner and he told me he would question the accounting manager the next morning.
At first she denied it. Then she claimed she was only borrowing the money and was going to pay it back. She was fired on the spot and the police were called. When the investigator arrived, he asked us if the embezzler had offered to pay back the embezzled funds. The owner stated that the embezzler had, in fact, been calling non-stop that morning trying to get him to accept the restitution money.
The investigator revealed that many embezzlers are serial embezzlers and that they use this “payback approach” to avoid prosecution. He went on to say that many employers will take the money and allow the embezzler to go free—free, that is, to try to embezzle from another business. This might explain why she had a clean criminal record. The owner, being an honorable businessperson, told the investigator he would give up the $10,000 payback to have justice served and her conviction recorded.
As I hear about companies being embezzled, I feel great sadness for the owners. I know personally how easy it is to be deceived and how a breach of trust can hurt, both financially and emotionally. The truth is that embezzlement never takes a day off. It is always out there lurking–waiting for an opportunity to present itself. Add a little motivation and new headlines appear.
There are many great guidebooks on ways to reduce the chance of embezzlement in your company. The one that I often refer to is Policies & Procedures to Prevent Fraud and Embezzlement by Edward J. McMillan, CPA. Get a guidebook, read it and become proactive against this persistent threat.
Most of all, don’t be overly trusting, no matter how well-credentialed an employee might be.
