• Tips for Preventing Fraud and Embezzlement
  • June 28, 2012
  • Law Firm: Spengler Nathanson P.L.L. - Toledo Office
  • Fraud/Embezzlement? Not at My Company!

    Myth: Fraud and embezzlement occur only at large companies.

    Fact:  Smaller firms are more likely to encounter fraud and embezzlement than large companies.

    Myth: My company does not handle enough money to suffer a large loss.

    Fact:  The average loss at smaller firms is $140,000.00.

    Myth: Fraud happens because of someone on the “outside.”

    Fact:  A recent survey found that 30% of fraud is caused by employees and 55% by managers. Only 9 % of fraud is caused by vendor/client and 6% by others/scams.

    Myth: Fraud and embezzlement relate only to money.

    Fact:  While the two primary types of fraud are theft of money and check           fraud, other types of fraud include misuse of expense accounts, credit card theft, payroll theft, conflict of interest or bribery, inventory theft, kickbacks, and government reporting fraud.  All are on the rise.

    Most small to medium size employers, including not-for-profit corporations, service organizations and family business are surprised to learn that embezzlement or fraud can strike them in spite of their “family like” atmosphere and culture.  Small companies, churches, service organizations, and charitable groups have been experiencing a large number of frauds and embezzlements during these rough economic times.

    Following are a few simple ways to protect your company or organization from fraud losses:

    1.     Know your Employees.     

    Screen new employees and re-screen current employees.  Secure authorization from all employees for background checks during the entire period of their employment (some background checks might be prohibited for public sector employees or employees covered under a collective bargaining agreement).

    Watch for warning signs, such as employees who experience life changes and an increased need for money (marriage, divorce, new baby, medical problems, disgruntled behavior).  Watch for embezzlement opportunities, such as weakness in internal controls, internal reorganization, or increased job responsibility for a particular employee, including the ability to override policies.  Advocate and enforce integrity and ethics policies at all times.

    2.     Admit and acknowledge your intuition. 

    You know your company and employees as well or better than anyone else.  If something feels wrong, follow your intuition.  Most instances of fraud and embezzlement are caught because someone outside the company finds something amiss. Almost every time, a manager or owner will indicate that they “felt” or “sensed” something wasn’t right, but they ignored their intuition and ignored the warning signs.

    3.     Insist on strong internal controls. 

    Separate critical functions, such as approving check requests from preparing checks and signing checks.  Also, make sure to store blank checks securely and limit access to only necessary persons. Consider requiring two signers for checks over a set amount and limit the number of registered signers to only those needed. 

    The accounting department’s mail should be delivered unopened.  Separate receipt of customer payments from endorsement of the payments and deposit of checks and cash.  Only authorized persons should make deposits and deposits should be made the same day as the cash/check is received. 

    All checks should be stamped: FOR DEPOSIT ONLY, NAME OF BANK, and ACCOUNT NUMBER.  Avoid sticking checks in a drawer or a safe for deposit later.  Balance receipts and bank deposits regularly.  Always double-check bank receipts against actual deposits and compare bank deposits quarterly to budget guidelines. If possible, have a quarterly review of bank statements by a non-signer to the account. 

    4.     Require all employees to take a mandatory vacation or leave.

    All employees should be required to take vacation for at least five business days each year.  Many fraud schemes and embezzlements are discovered when the culprit is out of the office and something “odd” is discovered by another employee.

    If you think you or your company employees would benefit from a more detailed discussion of tips to prevent embezzlement or improve your internal controls, please feel free to contact us to arrange for a meeting or presentation. 

    Laurie J. Pangle  [email protected]; 419-252-6251.