Prevent Embezzlement & Protect Your Company’s Assets
What you don’t know can hurt you when it comes to embezzlement and frauds. Did you know, on average 5 percent of revenues are lost to fraud? Could your company survive with loss of revenue, reputation and key staff/stakeholders?
If you live in our beautiful Central Oregon communities, you likely have heard, read or seen the shocking reports of employee embezzlement that have rocked our community in the past few weeks. You may have wondered how such frauds with the staggering amounts can happen, how the company’s affected did not know that fraud was occurring or you may wonder how you can protect your own business from the same fate.
Embezzlement is defined as “theft or misappropriation of funds placed in one’s trust or belonging to one’s employer” according to the Oxford Dictionary. Unfortunately, occupational frauds such as embezzlement can happen to any company. In fact, small businesses with less than 100 employees experience at occurrence of fraud more than any other size of company (30.1 percent) and the median losses of $150,000 were the same as the largest corporations, those with more than 10,000 employees, experienced according to the ACFE 2016 Report to the Nations on Occupational Fraud and Abuse. As you can see, the potential cost of frauds that occur within the workplace are substantial with the ability to cause significant impacts such as business closure, loss of business, loss of reputation, legal costs and more.
The good news is that prevention of fraud is possible when companies are proactive and understand how to protect themselves and their companies. One misconception that occurs many times is within small organizations.
Owners and business leaders believe that their long term trusted employees would never betray the trust built by committing fraud. Understand that most frauds occur based on three points: Financial Pressure, Perceived Opportunity and Rationalization. Together these points are known as the Cressey’s Fraud triangle.
If a long standing employee is experiencing financial pressure or perceived financial need, and has the opportunity, then they can rationalize the theft regardless of the relationship with the employer. These people know that they are trusted and many times rationalize that they are just taking a loan and will pay it back as soon as the pressure is relieved. According to the ACFE, 88.3 percent of employees who committed crimes had no previous record of such crimes and 82.5 percent had never been disciplined or terminated for such activities.
Shockingly, employees who had been employed for less than one year only made up 8.2 percent of occupational frauds, while those who had been employed at the victim company for more than five years made up 49.4 percent of cases.
Thankfully simple steps can be taken to protect company assets from employee misuse. Please keep in mind that these steps can and should be customized for the size of business, type of assets involved and type of business.
1. Have a yearly fraud risk assessment conducted
by a CFE. A fraud risk assessment is a tool that is used by an organization to systematically identify where and how fraud may occur and who may be in a position to commit fraud. This tool drives an organization to identify fraud risk schemes as well as respective internal controls that may prevent or detect these schemes.
Additionally, a fraud risk assessment will measure the detective or preventative internal controls already in place to ensure they are designed and operating effectively. (ACFE) A yearly review is preferred as risk can change with the business environment and should be reevaluated on a regular basis. A fraud examiner can assist in designing appropriate internal controls, policies and procedures as well as can conduct fraud policies and training.
2. Enact a Fraud Policy within the company. Provide fraud training to all employees including how to report suspected frauds. Employee tips continue to be the leading detection method for frauds
within organizations.
3. Enact an open door policy. Know your employees including their families, lifestyles and stresses/problems so that you can potentially notice red flags.
4. Put Internal Controls in place such as:
a. Bank and credit card statements should be delivered to the managing partner at a home or separate address for the his/her personal review.
b. Checks and debit memorandum should be reviewed with the statements.
c. Checks and wire transfers should require two signatures and signatures should be verified.
d. A copy of the bank reconciliation completed, attached to the monthly bank statement and reviewed by at least one other party (Two is preferred due to the possibility of two employees working together to commit fraud)
e. Checks received in the mail should be immediately endorsed by the individual who opens and processes the mail. This person should not be the person who deposits the checks or inputs into the accounting system.
f. After checks are properly endorsed, the accounting or bookkeeping department should take charge of the checks for deposit.
g. Purchasing records should be reviewed.
h. Appropriate approval and signing authorities should be put into place.
5. Do not use signature stamps.
6. Do not pre-sign checks for times when out of
the office.
7. Finance or accounting personnel should not be signers on bank accounts.
8. Conduct surprise spot checks or audits several times a year.
9. Hire a CFE or other outside party to review all new employee, independent contractor, vendor and customer set ups to ensure validity and proper set up.
10. Complete background checks on all
new employees.
11. Obtain fidelity insurance to protect against potential losses.
12. Require vacations and cross-training.
13. Know the Red Flags for Employee Fraud.
3 Employees living beyond their means. (Luxury homes, cars, items, frequent, lavish vacations, private schooling for children)Note: Many times employees will contribute this to an inheritance, lotto or gambling winnings, etc. Even when it is a trusted employee, verify the story.
3 Employee financial difficulties
3 Unusually close association with vendors and/or customers.
3 Control issues.
3 Refuses to take vacation or is resistant to cross training.
3 Divorce/family problems.
3 Addiction problems.
3 Complaints about unfair treatment or compensation.
3 Change in behavior such as irritability, suspicious or defensiveness.
3 Excessive pressure from within organization.
The key to prevention begins with being proactive and aware as well as having the proper internal controls in place. If employees know that management and/or owners are paying attention, they are much less likely to commit fraud. Furthermore, being proactive will allow any fraud that is being committed to be discovered much faster which substantially reduces the amount of loss. Keep in mind, an employer should never accuse an employee of a crime without proof and cause.
A thorough investigation should be done in advance by an individual or company who specializes in employee investigations to ensure that the company is not at risk for a lawsuit for wrongfully accusing an employee of a crime.
As our community continues to grow, we likely will continue to hear an increasing number of stories such as the embezzlement cases we have learned about recently unless we join together to prevent fraud and protect our wonderful community from these types of crimes.
As they say, “An ounce of prevention is worth a pound of cure”. Nothing could be closer to the truth when it comes to embezzlement and other occupational crimes.
Melissa Goddard is a certified fraud examiner and an Oregon Licensed Private Investigator who holds an MBA in Economic Crime and Fraud Management. Melissa is the owner of FACT Financial Investigations, LLC, based in Bend, offers fraud deterrence, detection and investigation services to individuals, corporations and lawyers throughout Central Oregon. Melissa is passionate about her objective to reduce fraud and financial crimes in our Central Oregon communities as well as around the globe and to inform, train and assist those who have been victimized or who are at risk for being victims of fraud and financial crimes. FACT Financial Investigations, LLC also offers notary, bookkeeping and compliance services and will be adding tax resolutions services in the near future.
Melissa Goddard, CFE PI, FACT Financial Investigations, LLC
factfinancialinvestigations@gmail.com, 541-241-6250
