Trust Your Instincts

Spotting theft from within

Have you ever opened the bank app on your phone and thought: “That can’t be right. We should have more cash than that”?

Maybe you don’t get financial statements every month, or if you do, maybe you don’t understand what you’re looking at. But you are good at keeping a mental track of things. You know you’ve had good sales, you have a solid idea of who’s paid you and who hasn’t and whom you owe and how much. You know how much your monthly overhead is. 

You have a knot in your stomach looking at the app because things just don’t add up. When that’s the case, and especially if that is often the case, you may be a victim of fraud — more specifically, embezzlement.

If it happens to you, you won’t be alone. The Association of Certified Fraud Examiners estimates the average U.S. business loses 5% of its sales to fraud every year. 

In just the last eight months, I have assisted the owners of four companies in uncovering significant embezzlement, all of it committed by “trusted,” long-term employees. In every case, the owner “couldn’t believe it” until confronted with strong evidence and admissions of guilt. Two of the four schemes we detected had been going on for years and were only discovered when the embezzlers took larger and larger amounts to the point that the owners thought: “Something is wrong.” 

Trust but verify 

We may not enjoy looking into people’s work or asking pointed questions that people consider insulting or accusatory, but our attitude toward fraud should be: “Trust but verify.” We must maintain the attitude that embezzlement is not only possible but likely. 

Everyone in our organization should know we are constantly watching and have systems in place to prevent fraud. It’s not personal; it’s just the way we do business. The message should be zero tolerance.

Motives and methods

Our efforts to prevent fraud protect not only us but also our employees. In a moment of weakness, they may set in motion a series of thefts that ruin their reputations and even land them in jail.

Most embezzlers don’t intend to become thieves and almost always start small. A bookkeeper who worked for me had a family emergency and took a few hundred dollars, intending to return it. She paid back a little but eventually “forgot” to pay back the balance. Nobody noticed, and something else came up. She took a little more, still intending to pay it back. Again, nobody noticed. 

Over time, this mother of three dropped all pretense of “borrowing,” and family emergencies became clothes, vacations and a car. In the end, she wound up with a ruined reputation and jail time. 

As for methods, those of us who don’t think like thieves are often surprised at how embezzlers do it. We are even more surprised at how easy it is. If you are at all familiar with basic anti-theft accounting controls, the following examples will seem obvious, but they all worked. Some real examples of methods I have seen include:

Deposit and delete: A bookkeeper created a company with a name similar to the company she worked for. She intercepted customers’ invoice payments, deposited the funds in her business account and deleted the customers’ invoices. Poof! The transactions and money were gone. 

Sweetheart check: A bookkeeper responsible for payroll paid her boyfriend $600 per month for labor he didn’t do. 

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Supplier charges: An especially common scenario is when an employee buys gas or meals on the company credit card or buys a few personal extras from the supply house along with an authorized purchase. I have seen many examples of employees who use the company card for personal purchases “by mistake.” I have never seen an employee use a personal card for company purchases “by mistake” or otherwise.

Phony invoices: An employee working with a collaborator at a supply house created invoices for products never ordered or received by the company. 

Side work: Technicians do work on the side using the company’s equipment, materials and parts.

Changed name on a check: The bookkeeper issued a check in their bookkeeping software to pay a legitimate bill. The books showed a proper payment to a legitimate supplier, but she changed the name on the actual check and deposited it in her personal account. 

Paid personal credit cards with company ACH: This involved a bookkeeper who had a credit card from the same provider as the company. She simply paid her card along with the company cards using a bank app. 

If you’re not vigilant, these seemingly obvious schemes are easy to miss.

Steps to security

If you have a knot in your stomach, ask your bookkeeper for an explanation in a nonaccusatory way. There might be a good explanation. 

However, it is a significant warning sign if you hear excuses or if you get a garbled, lingo-filled explanation you don’t understand. When that is the case, go to an outside CPA and ask them to look through your books. Whether or not they find evidence of fraud, ask them to set procedures so you get reconciled financial statements every month, and ask them to help you set up controls to defend against embezzlement.  

At a minimum, start following these steps regularly:

Look through every payroll report for names you don’t recognize.

Review every credit card statement every month looking for items you don’t recognize.

Review every bank statement every month for unusual, unexplained transactions. (Look at the pictures of checks shown on the statements to see to whom they were actually written.)

Don’t be surprised if you find fraud, and don’t accept it as part of doing business. Remember — your new policy is zero tolerance. 

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