Embezzlement: More Precautions
Steve Capper and Steven Elias – Flexible Funding - July 21, 2017
A recent CAPC article by attorney James Dowgialo dicussed embezzlement and a few preventative procedures. Because the subject is so critical, we would like to offer additonal precautions that you can take.
Timely bank account reconcilitation is important. The bank is obligated to reimburse a customer’s account if checks were paid over a forged signature or endorsement, but only if the customer is free of negligence and the forgeries were detected within a reasonable length of time. ‘Reasonable’ at some banks is now 30 days. Ideally, checking accounts should be reconciled as soon as the statement arrives.
The owner should examine canceled checks. Check endorsements to see if there is any pattern of where they were cashed. Note checks that are cashed by parties other than those written to, or third party endorsed checks. Review multiple checks isssued to the same person during the same pay period, and voided/manual checks and invoices. Look for discoloration on a check; alteration is accomplished by modifying with the use of chemicals applied to locations such as the payee line or signature. Compare signatures on checks. Slants, i’s and e’s are almost always the same in signatures by the same person. Be suspicious of any check repaired with tape.
Payroll crime often begins with the theft of a check and the issuance of checks to friends, relatives or ghost employees. Occasionally examine pre-numbered check stock sequence to see that checks have not been removed from the middle or back. Embezzlement is also perpetrated by retreiving a canceled or old check from the garbage, so create a disposal policy. Store checks in a locked place.
Total hours paid vs. total hours billed each week must be matched, and un-billed hours accounted for. If an employee is overpaid, the customer is usually over-billed, unless it is intentional. Examine job cost reports regularly to monitor total sales vs. payroll and the resulting margin percentage, looking for changes in pattern for individual customers or in overall totals. Percentages normally tend to be constant. Look at details of low margin accounts, credit memo reports, and cash receipt reports. Controls should ensure that only legitimate employees can be added, with approval from a trusted official, and that rate of pay cannot be changed without authorization / documentation.
Separation of duties can eliminate the unauthorized issuance of checks and doctoring of records. Different individuals, independent of each other, can perfrom the various duties of time reporting, personnel record keeping, check stock custody, check production and signing, bank statement reconciliation. Some rotate check disbursement. Some print paychecks so an official must sign them by hand. Others require checks to be countersigned by two officials, in front of each other.
Make sure record keepers know others will see their work. Have several people prepare payroll and rotate the function. Embezzlers may decline vacations, never call in sick, or always eat lunch at the office since anyone taking over their duties would discover their swindle. Require vacation. Spot check the work of payroll employees who always come in early, leave late and always come back early from lunch, especially if the job does not require it.
Bonding is useful because bonders, seek recovery from the culprits with a vengeance, relieving you of the chore. This is important for bosses seen as “nice people.” Employees may sense that “nice people” would not prosecute, but that bonding company would not be lenient. Many bosses are reluctant to take action for fear of making false accusations, fear of adverse publicity, or sympathy for the employee. Let employees know that bonding is a company policy rather than a feeling of mistrust.
Paper tests may be given to identify individuals who are high risk for behavior such as embezzlement. They also screen for drug use, theft, violence, time card fraud, etc. Tests consist of questions designed to reveal negative attitudes, behaviors, and lifestyles.
Know your employees to the extent that you may be able to detect signs of financial or personal problems. Lastly, disseminate a policy denouncing theft and declare the company’s intention to pursue both criminally and civilly.