Is embezzlement trending? It seems to be. For most of my career, embezzlement was something I read about in the newspaper (back when newspapers mattered). Or I read about it on news sites as the internet took over. It was a rare event; newsworthy. But I never had experience, first, second or even third-hand, with embezzlement.
In the last five to ten years that has changed dramatically. While I still read about high-profile cases, I now have multiple cases of embezzlement that have been relatively close to me. These have involved clients, former clients, friends and business associates.
Case #1
In this case, the accountant/bookkeeper had full responsibility for all aspects of the accounting. The fraud was accomplished by taking the payroll deposits due to the IRS and redirecting these amounts to a personal account. This was difficult to detect because the amounts in the accounting system were correct. The money just wasn’t getting to the IRS. This was a mess because the business owner, while a victim, was held personally liability for any trust fund amounts plus late payment penalties.
Case #2
This fraud was accomplished by the Controller at a specialty building contractor. Fraudulent checks were written by the Controller to himself. He was able to cover this because he did the bank reconciliations. Like many small businesses, there was no system of internal controls.
Case #3
The Controller for this manufacturing company made the bank deposits. Even though this was a cashless business, she got large amounts of cash back from the deposits she made. Adjustments were made by the Controller in the accounting system to cover her tracks. In this case the bank noticed and phoned the owner.
Case #4
A professional service company’s accountant made an extra check for herself with every payroll. She even set up a separate account so her spouse wouldn’t know. She forged the signature on her extra check. Her family was surprised when the police took her away in handcuffs.
Case #5
A retailer suffered fraud by an accountant that helped with the cash counts. Cash was stolen but the excellent records documented the case against her.
Fraud Triangle
The theory of fraud says there must be three elements present to have fraud:
- Financial pressure creating need.
- Opportunity, usually as a result of weak internal controls.
- Rationalization, in which the perpetrator overcomes their sense of right and wrong.
Common Elements
These five examples of fraud have several common elements. First, they were all frauds committed by employees, insiders. And in particular, I’m embarrassed to say, by accounting employees. Second, all these employees were trusted by the owners or management. Obviously this trust was misplaced. And third, in most cases, the employee rationalized what they were doing by convincing themselves that they were getting a loan rather than stealing. At some level, they thought they would pay the money back.
How I Can Help
While a very clever fraudster can be hard to catch, there is a lot that can be done to prevent fraud. One of my roles as a consultant CFO is to oversee the performance of the accounting staff. More importantly, setting up a strong system of internal control is the best preventive action one can take. This requires some specialized expertise but it is something I’m well versed in.
None of the above frauds occurred while I was actively engaged as the CFO for any of the companies that fell victim to these frauds. Could I have prevented them? Probably, although maybe not all of them. But certainly they would have been detected earlier.
Fallout
The fraudsters all lost their jobs. Some were prosecuted while most were not. (Most businesses don’t want the negative publicity.) At least one went to jail. Some made restitution, typically by a parent paying the money back. In one case the business failed as a result of the financial damage done.
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