Look around the office. Look around your organization. Is it possible one of the employees is an embezzler ?

There are frequent news stories about how an employee has managed to divert funds to his or her own pocket. For example, what about about the bank employee who set up a line of credit for a non-existent business. She proceeded to draw on the line of credit and racked up a big debt for the bank while spending the money at a casino.

What about the receptionist in the Doctor's office was able to pocket patient co-pays because the Doctor never reconciled his daily office visit reports with daily receipts.

In another instance, a man ran a consulting business with a partner. Unknown to him, the partner set up a secret business account using their company name. Every so often, he would deposit business checks into his secret account, effectively stealing the money for his own purposes.

While the embezzlers making the news were caught, many smart embezzlers never get caught. If you own a business, are mayor of a small municipality or run a non-profit and you think you are immune to embezzlement, then your treasury is a great target.

So What Is Embezzlement anyway ? In legal speak, embezzlement is the fraudulent appropriation of property by a person to whom it has been entrusted. The key word here is entrusted. That's what makes this crime different from ordinary theft or larceny. The embezzler is someone you trust. As a result, you have given them too much control. Embezzlers usually think that they are smarter than their boss and cunning enough to beat the system. Before you set about to outwit them, it is a good idea to be familiar with some of their methods of operation.

Methods of embezzling are limited only by imagination. Here are a few common methods:

REGARDING CASH AND ACCOUNTS RECEIVABLE. GIVE SERIOUS THOUGHT TO THESE POINTS :

1. Are receipts issued when customers make cash payments ? This is a MUST. The receipts should be serially numbered and produce a carbon copy which stays undetached in the receipt book. (A cash register or automated system that performs the equivalent procedure is OK. But be sure it does.) You should hang a sign for customers that make them aware that they should receive a receipt when paying cash. EXAMPLE: If you pay cash and do not receive a receipt, please contact me ( Name ) personally at Telephone Number.

2. Send statements to credit customers even if their account is paid in full prior to statement preparation. (Postage savings is not relevant.) Statements should contain a note asking that you be personall notified if there are any errors or activity inconsistent with the customer's records or memory. Customer feedback and your employees' knowledge that feedback has been solicited is a good deterrent.

3. When payments are received by check, require that they be immediately endorsed with your FOR DEPOSIT ONLY rubber stamp which includes the bank account number. By immediately, this means the first thing done when your employee is handed a check. If handed a check with a blank payee line, the employee must also affix a stamp for this. Observe and reprimand employees that do not comply.

4. Ideally (but often a tough chore), have one employee (or yourself) open the mail, list the payments received and make the bank deposit. A different employee should post the accounting records from the list.

5. There must be a daily close-out that balances all receipts to the daily bank deposit to the daily entries in the accounting records for revenue or payment on accounts receivable.

6. If not using a cash register, document all sales on serially numbered sales invoices or service orders. Require that any voided forms be retained. Once a sale is written up, require approval before it can be reversed.

7. Do not hire family or friends. Do not become so close with your money-handling employees that they feel you trust them totally. Require vacations. Beware of employees who never want time off or resist assistance from you or other employees. Do not have money-handling employees that are related or good friends. A little strife in the money-handling office is not all bad.

Watch Out ! You will be stolen from if the opportunity exists to get away with it or the thief feels
no punishment will result if caught. This includes theft by the nicest and most Christian people.

Since there are so many ways to embezzle money out from under your nose, it certainly pays to be paranoid. If you think you are safe from embezzlement, then you're not.

**************************************************************************************

An organization can loose a great deal of money before even suspecting that embezzlement might be going on. That's because this crime is committed by someone in a position of trust. The loss may involve a small amount taken by an employee from the cash register. Or a considerable sum may be stolen through an elaborate scheme of juggling the books.

Simple controls built into the accounting system can deter such practices. In any case, the proper internal controls may help document incriminating evidence, without which it is difficult to estimate your loss for insurance purposes or even to prove that it resulted from a crime.

You may not have had any experience with embezzlers. But many managers have. Every day some dishonest employee has managed to divert his or her employer's funds to their own pocket. It happens often enough to make it worth your while to give the subject some thought and to examine your recordkeeping procedures to make sure there are no tempting loopholes.

Of course, nobody wants to run a organization like an armed camp. You don't want to run off good people due to an atmosphere of mistrust. But if you have a built-in control system, administer it tightly, and audit it frequently, you may prevent embezzlement attempts. Employees should understand the need for this. If they don't understand this and behave as if you are insulting them -- they are a risk.

You probably cannot make your system 100% fraud-proof,
but you can implement some protections.

The first, and one of the most important things a manager should do, is to set a good example. Your employees watch what you do and are prone to imitate your habits - good or bad. An employer who dips into petty cash, fudges on an expense account, uses company funds for personal items, dodges taxes or sets other examples of loose business behavior will find employees rationalizing dishonest actions of their own. They will have the attitude "if it's good enough for the boss, its good enough for me." Additionally, if they get caught; you are in a tight spot if they have something on you.

Another important way a manager can discourage embezzlement is by establishing a climate of accountability. Employees should know their jobs and feel trusted. But they should also realize that they are held accountable for their actions. To some people, management indifference in financial administration is a license to steal. That's why it is important for you to examine your procedures and determine what controls can be added to forestall any dishonest practices. And, just as important, the system should be designed to help document evidence in the event someone does try to embezzle your funds. One problem in is that of proving the amount that was stolen for purposes of demanding recovery. The manager has to support a loss claim with evidence -- facts and figures that you get from your records.

Reliance for prevention and detection of fraud must be placed principally upon an adequate accounting system with appropriate internal controls that safeguard your assets. Your public accountant can be of great help in setting up a good recordkeeping system. But merely utilizing an excellent system like QUICKBOOKS will not establish controls. It's not the software, but the procedures, that will constitute the controls. Even if you have installed name brand accounting software, I can examine your current system of operations for weaknesses.

One fundamental control is separation of the duties among employees. For example, persons concerned with receiving checks and cash should not also be responsible for the entries in the accounts receivable records. No one person should handle a transaction from beginning to end. If you do not exercise tight control over invoices, purchase orders, discounts, customer credits, and so forth, you are asking for trouble.

You should insist that you produce operating statements at least monthly. These will inform you of the operations to date and the firm's financial condition. You can use these documents to compare the figures with prior periods. Any unusual or unexplained variations should be looked into.

You know how in medicine the symptoms of one disease often resemble those of another. Likewise in finance the symptoms, or danger signs, of an embezzlement are often caused by other factors. Here are a few clues which indicate that either an embezzler is at work in your organization or certain aspects of the operation need more of your attention.

Increase in overall sales returns could be caused by defective merchandise - or it might represent a concealment of accounts receivable payments.

Unusual bad-debt write-offs can be due to a number of reasons - or they could be covering up a fraudulent scheme.

A decline or usually small increase in cash or credit sales might mean that business has not been good - or it could mean that some sales were not being recorded.

Inventory shortage can be caused by error or mismanagement - or they could indicate fictitious purchases, unrecorded sales, or employee pilferage.

Revenue declines and/or increases in expenses can be entirely legitimate - or they could be a sign that cash is being siphoned off illegitimately.

Slow collections can be caused by economic conditions - or they can be a device to mask an embezzlement.

Are there employees that handle money or keep the books who work all the time ? They never want to take vacation. They do not want any help. They perform work themselves that is below their pay level when it could be delegated to lower level employees.

Ounce of Prevention = Pound of Cure ( As Ben Franklin also said: "A stitch in time saves nine." )

There are many steps a manager can take to cut down on the possibility of losses through embezzlement. Do you take the following precautions?

1. Check the background of prospective employees. Verify and call previous employers. Sometimes you can satisfy yourself by making a few telephone calls or writing a few letters. Call me and I can check public records to see if he or she has indebtedness problems.

2. Know your employees to the extent that you may be able to detect signs of their financial or personal problems. Build up rapport so that they feel free to discuss such things with you in confidence.

3. See that no one is placed on the payroll without authorization from you or a responsible official of the company. If you have a personnel department, require that it approve additions to the payroll as a double check.

4. Have the company mail addressed to a post office box rather than to your place of business. In smaller cities, the manager may want to go to the post office to collect the mail. In any event, you or your designated key person should personally open the mail and make a record at that time of cash and checks received. Don't delude yourself that checks or money orders payable to your organization can't be converted into cash by an enterprising embezzler.

5. Either personally prepare the daily cash deposits or compare the deposits made by employees with the record of cash and checks received. Make sure you get a copy of the duplicate deposit slip or other documentation from the bank. Make it a habit to go to the bank and make the daily deposit yourself as often as you can. If you delegate these jobs, make an occasional spot check to see that nothing is amiss.

6. Arrange for bank statements and other correspondence from banks to be sent to the same post office box, and personally reconcile all bank statements with your company's books and records.

7. Personally examine all canceled checks and endorsements to see if there is anything unusual. This also applies to payroll checks.

8. Make sure that an employee in a position to mishandle funds is adequately bonded. Let employees know that fidelity coverage is a matter of company policy rather that any feeling of mistrust on your part. I f would-be embezzlers know that a bonding company also has an interest in what they do, they may think twice before helping themselves to your funds.

9. Spot check your accounting records and assets to satisfy yourself that all is well and that your plan of internal control is being carried out.

10. Personally approve unusual discounts and bad-debt write-offs. Approve or spot check credit memos and other documentation for sales returns and allowances.

11. Don't delegate the signing of checks and approval of cash disbursements unless absolutely necessary and never approve any payment without sufficient documentation or prior knowledge of the transaction.

12. Examine all invoices and supporting data before signing checks. Make sure that all merchandise was actually received and the price seems reasonable. In many false purchase schemes, the embezzler neglects to make up receiving forms or other records purporting to show receipt of merchandise.

13. Personally mark "PAID" on invoices when you sign the check to prevent double payment through error or otherwise.

14. Don't sign blank checks. Don't leave a supply of signed blank checks when you go on vacation.

15. Inspect all prenumbered checks, prenumbered receipts and other prenumbered forms from time to time to insure that each one has been accounted for. Retain all voided prenumbered forms.

16. Have the preparation of the payroll and the actual paying of employees handled by different persons, especially when cash is involved. Check into using a payroll service. These are great bargains in my opinion.

17. Force workaholic employees to take some time off or cross-train in another area of operations. Have another employee (or Temp) perform their duties for a while.

First of all, be sure that you do not jump to any unwarranted conclusions. What may appear to be an obvious embezzlement may, on further investigation, turn out to have a perfectly valid explanation. A hasty false accusation could result in serious civil liability. There have been cases where employees have been charged by management with embezzlement, dismissed from their positions, and later found to be entirely innocent.

But if you have good reason to suspect embezzling, contact me. Let me help you look more squarely at the situation and we can discuss how to best proceed.

Don not subject yourself to criminal charges by helping to conceal the commission of a crime. Embezzlers should be prosecuted when the facts warrant and when there is a sufficiency of evidence.

The news media have given a lot of publicity to computer-assisted frauds and embezzlements. The computer crimes receiving this publicity are usually complex and give the impression that computers-related frauds can be committed only by highly skilled technicians using sophisticated computer systems. This could create a feeling of false security for those who use less sophisticated systems or service centers for processing their records.

A study by the U.S. General Accounting Office of Computer-Related Crimes disclosed that most computer-related crimes were committed by people with limited knowledge of computer technology. Most cases resulted from preparation of false input or alteration of data. Neglect of control on input is a weakness.

Take the case of the small municipal water department. The cashier that collected payments was the same employee that prepared the bills. She knew which customers usually paid cash. She would prepare the water bills and mail them out. After the mail-out, she would adjust some cash-paying customers' bills using lower water rates. She would not mail this bill out, but destroy it or never print it. This new bill would be the bill of record in the computer system. When the customer came in to pay their $60 bill in cash, only the $40 bill in the system would be processed as paid. The other $20 would be pocketed. The accounts receivable figure in the system would be correct and the customer would be paid in full.

There are three principal ways in which you can minimize the possibility of embezzlement losses. None is completely effective without the others.

1. Internal controls are perhaps the most effective safeguard against fraud, but even the best precautions can't make it absolutely impossible.

2. Independent audits may discourage fraud and may uncover it unless employees have the sense from past audits that they are routine "checklist" reviews resulting in a bland report full of financial jargon. Very little fraud is actually uncovered from routine annual audits. This further emboldens the employee who is already stealing. When you hire a CPA, they usually regard their duties (for which they charge considerable fees) as preparing your financial statements or preparing your tax and compliance forms or certifying that your financial statements comply with generally accepted accounting principles. If you want the CPA to investigate embezzlement, MAKE THAT CLEAR. Do not let a CPA dictate what you need. You are paying them. To get the best value, know what you need and clearly define what you want their scope of work to be. Insist that any report be candid and in plain language. All self-serving statements and required accounting jargon should be in an appendix. ( Please do not hesitate to call me. I will be happy to discuss your situation with you.)

3. Fidelity coverage can help you recover what may be lost in spite of your best efforts to prevent embezzlements. But good records are necessary to prove there was a loss.

**************************************************************************************