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Reviewing a Case of Employee Fraud

She was the perfect employee. She could do it “all.” She was a long-time employee of the company and as time went on, had been given additional responsibilities so the owners wouldn’t have to be inconvenienced to sign checks each time the bills were paid. As the company bookkeeper, she was tasked with handling the payroll and monthly bill pay operations as well as preparing the monthly financial statements and reconciling the bank account. When the owners were out, she had the authority to sign checks as needed. Given her check signing authority, and in an effort to have some internal controls, the owners would review the cancelled checks that came with the bank statement. Little did they know that this review did not prevent her embezzlement of company funds. So, how did she do it and how was this detected?

The event that initially triggered the investigation began when the owner received the bank statement and opened it to review both the statement and the cancelled checks. Usually, the bookkeeper opened the statement first and later handed it to the owner for review (this is not recommended). When the owner opened the bank statement envelope, he noticed a returned “item” from the bank – a check made out to the business by the employee and then returned due to a stop payment. Employees would sometimes write small checks to the company in exchange for cash ($5, $10) at the front desk. While not for a large amount, the check exceeded the norm. The alarming part was the fact that the employee placed a stop-payment on the check, which, in essence, appeared as an intent to not repay the business for the cash taken. After the owner confronted the employee, she admitted to “borrowing” some funds. Little did he know that this was just the tip of the iceberg. The employee was also writing two extra checks a month to herself in amounts that on a bank statement would not appear suspicious. She would then remove and destroy the two extra cancelled checks written to herself from the bank statement envelope prior to the owner’s review. The owner’s process including skimming through the checks in the envelope (often in the hundreds), and unless he compared every check to the checks cleared on the bank statement, would not know that there were missing checks. Further examination of the bank statement itself revealed a strange pattern of an increase in refunds to members via the credit card machine. These debits or charges on the bank statements showed up as a lump sum with no customer detail provided, so investigating the reason for the increase required a review of the supporting documentation. When it became apparent that some of the supporting documentation was missing, further action was taken with the bank to identify the customer. After it became evident that this employee was embezzling company funds, and through the help of the county attorney’s office, subpoenas were issued requesting copies of her bank statements, deposits and credit cards statements. An analysis of her records showed that she was not only defrauding the company by writing herself two extra checks a month, but she was also routinely paying some of her credit card bills by running her card through the merchant machine and processing a refund to her account. From a concealment perspective, she changed the payee on the extra checks in the accounting system (computerized software) and coded the transaction in such a way that the owners would not see anything awry if they happened to be in the system reviewing transactions. The customer refunds were often lumped together as one entry so detecting this was difficult without reviewing source documentation. In the end, this employee embezzled thousands of dollars over a period of time.

This example illustrates the need for strong internal controls. In a small business where it is often difficult to segregate duties, it is still imperative that some duties be separated. For one, the individual reconciling the bank statement and preparing the monthly financial statements should not have the authority to sign checks or have access to cash. Fraud is a serious concern in today’s economy and profiling the white-collar criminal is not as easy as it seems. While many employers fear the public embarrassment of taking legal action, not doing so lets the perpetrator continue their criminal behavior elsewhere.

In conclusion, the Association of Certified Fraud Examiners (acfe.com) provides a host of resources for businesses interested in performing a fraud “checkup,” including internal control checklists, articles and common red flags. As Benjamin Franklin once said, “An ounce of prevention is worth a pound of cure.” FBN

By Jenny Staskey


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