Preventing embezzlement can keep you in business

March 12, 2012
| By Rob Dwortz |
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A 2011 Marquet International Ltd. study found that Michigan tied for second place for having the most major embezzlement cases in the nation, at 5.9 percent of the total. The Marquet study also found that Michigan’s major embezzlement losses reached more than $9.8 million.

These alarming statistics are just one reason Attorney General Bill Schuette announced back in February 2011 that his office would aggressively investigate and pursue fraud, embezzlement and corruption by launching a new Public Integrity Unit. Since then, the Attorney General’s office has ratcheted up the fight against white collar crime at the state and local levels.

“Corruption scandals have damaged the public's trust in government and left Michigan with a national reputation as a place where businesses wonder who they have to pay off before creating a job," said Schuette in a statement. "Today, we are turning up the heat on corruption in Michigan. There will be no more Kwames.”

News reports regarding the establishment of the new Public Integrity Unit cited ongoing fallout from Detroit corruption scandals and other issues statewide that have damaged Michigan’s reputation as a place to create jobs.

This focus at the state level also has altered how county prosecutors view embezzlement, and they too are taking a more aggressive approach to prosecuting embezzlement cases of all types. 

Embezzlement cases are like accidents: You never expect them and they can hit you hard. Offenses can happen over a long period of time or be a one-time incident.

The most common types of embezzlement include:

  • Failure to record cash transactions;

  • Claims for false reimbursements;

  • Use of company accounts for personal transactions;

  • Payroll fraud;

  • Fraud through supplier accounts and other payables.

Small businesses tend to be most at risk, especially family-owned businesses, as the owner tends to grow comfortable and complacent with long-time procedures and employees. Their employees become “part of the family” and are considered trustworthy. They don’t question the security of their accounts and cash flow until it is too late. They don’t implement simple checks and balances to detect fraud. Often, one employee is responsible for managing multiple financial tasks, enabling them to “cover their tracks.” The trust is built, and an owner never considers the risk.

We recommend family businesses protect themselves with these seven simple steps:

1. Lock up your checkbook: Businesses often store hundreds of blank checks in an unsecured cabinet. Locking up the checkbook will avoid this potential theft.  Never sign blank checks.

2. Diversify the workload: Delegating the same person to open the mail, record receivables and handle deposits can be very tempting. Diversifying the workload makes it hard for would-be embezzlers to write themselves checks or create fictional vendors, because they know another employee will be double-checking the bookkeeping. Setting up dual control over financial processes is critical.

3. Consider third-party reconciliation: Many embezzlement cases involve an employee writing checks for personal expenses or to themselves, and destroying the returned cancelled checks. Because few business owners have time to do monthly reconciliations, this can go unnoticed. Also, if a company has a large cash flow, it’s easier to cover up an embezzlement scam. Hiring an outside accounting firm could be an option for reconciling bank statements. 

4. Walk the line on lines of credit: Business owners should limit who is authorized to request advances on their line of credit and limit access. Again, if the same person who writes checks has authorization to request cash advances, the business owner has unwittingly made it easier for an unscrupulous employee to steal.

5. Keep your ACH transactions in order: Automatic clearing house payments can expedite receipts/payments by providing electronic access to/from company accounts. But if the account numbers fall into the wrong hands, a bank account can be in jeopardy. Business owners should review electronic transactions on a daily basis.

6. Take out insurance: Service companies, retail businesses, accounting firms and schools commonly purchase fidelity bonds, sometimes called “honesty insurance.” The coverage is limited and ranges from $5,000 to $100,000. A company usually must disclose any prior losses from employee theft, and a claim requires conviction in court of the bonded person.

7. Don’t become complacent: Business owners are always shocked to learn that a long-term, trusted employee who has no apparent reason to steal has committed internal fraud. We advise our clients to schedule frequent financial reviews because personal circumstances can change and temptation can be hard to resist, particularly if an employee is facing a financial crisis or has developed expensive tastes or hobbies.

There are many tactics to curtail embezzlement, but by following these simple checks and balances, you can help prevent or contain fraud, theft or embezzlement.

Prevention is the key; no organization is immune to this type of crime and the devastating effect it can have on an employer. In just the past three months, the West Michigan region has seen its share of embezzlement cases filed by area prosecutors.

Businesses big and small, family-owned companies, nonprofits and churches have all been victims of embezzlement. It can happen in unexpected places, perpetrated by unsuspected individuals. In these uncertain economic times, the invitation to steal may be hard for some to resist.

One final thought. Don’t put your trusted employees/volunteers in a position where they may be tempted. Having appropriate controls in place protects the family business and its employees, which is in everyone’s best interest.

Rob Dwortz is president of The Bank of Holland.

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