EMPLOYEE THEFT: SOME
GUIDELINES ON SPOTTING IT AND PREVENTING IT
As discussed in
some detail in our article on
theft by employees within the United States and, for that matter, in the
general world wide business community, has long been recognized as the
single largest unreported loss faced by businesses. While the range of
such thefts stretch from occasional theft of minor office supplies to
large scale forgery of checks, most employers will cheerfully overlook
the small thefts so long as they can prevent the far more occasional but
often disruptive larger embezzlements that plague businesses.
person reading this article is likely to face substantial employee or
independent contractor theft some time in the next five years assuming
they engage in business on either coast of the United States or have
more than three employees. The statistics indicate that this is not
only a high likelihood but one should keep in mind that most such
thefts are never reported for reasons stated in the
articles. One must conclude that the actual incidence of such
employee thefts is at least double that reported.
that every business person must, as a matter of course, take steps to
safe guard against employee theft as part of their regular business
planning and implementation of systems within an office. Yet, aside from
such obvious acts as restricting signatures on bank accounts, few
businesses do take proactive steps as to employee theft. This is an
oddity of American business that strikes our business colleagues abroad
as particularly intriguing.
attorney laughed and told the author that it was part of the naivety one
sees so often in United States business people. Perhaps, but more likely
the equalitarian ethos of most American businesses combined with strict
employee protection laws make it both unpleasant and perhaps a bit
dangerous legally for the average business to become overt or crude in
dealing with the danger of possible embezzlement or theft by its own
computers and laser jet printers, it is easier than ever for people to
make documents that look legitimate. Computer checks can be printed that
bear your bank account number. Elaborate fake invoices can be created.
Depending upon where the opportunist is in a company, a scam can be
created to do almost anything, to shuffle money off, hide income,
articles on embezzlement discuss procedures to take once an employee or
fiduciary is located within the company. This article shall suggest
methods to locate and perhaps prevent such thefts before they begin.
1. Opening Bank
Statements: For small
businesses, one of the easiest ways to head off checks
going to the
wrong places is for the owner to be the first one to open the bank
statements. Before anyone else has a chance to touch the checks and the
bank statement, the bank statements should be scanned for unusual
transfers and transactions and the checks should be scanned for unusual
payees and payments. One of the hardest scams to catch is when forged
checks are made by the same person who does the bank reconciliation. It
is not unusual to have the person alter a bank statement to hide the
forged check. How? It need not be high tech. We have seen a situation
where the person cut the line out of the bank statement where the check
number and amount appeared and then photocopied the statement so that it
looked like nothing was missing. Obviously, the person destroyed the
original bank statements and the forged checks. The bank did not catch
the forged checks because they did not check the payer's signature. Few
banks do and in most states the liability of the bank for such
sloppiness is extremely limited.
2. Cash Receipts and
appearance of tight controls over cash receipts and
makes opportunists think twice. For cash coming in, if possible, have
the receiving and depositing of cash and checks handled by someone who
has nothing to do with the accounting system,
accounts receivable. Thus, if a customer pays and that payment is
stolen, it is likely to surface when you go to collect the receivable.
Where a cash register is involved, the “Hip Pocket National Bank” is a
very strong temptation. Since many types of transactions can flow
through the cash register, errors are common. Put simply, even some
honest employees have trouble making change. This makes it hard to
theft is not complex. The No Sale is the most common; accepting the
customer's cash, pressing the No Sale button, when the customer leaves,
the cash from the sale is taken. Having more than one employee working
sometimes help. One client had a regular “trap system” and would ask a
friend to drop by the store with an open eye every two weeks.
3. Inventory Theft.
Most often, the opportunist just takes inventory. Even when you
reconcile the inventory to your records, it can be quite hard to
determine what has been stolen by whom. Ringing up sales by using
Uniform Price Coding (bar labels) and running a perpetual
inventory system can help with this. Any business accountant can
advise on setting up these useful system.
It often surprises this office how few
of our clients think of simply bonding their employees. The price is
seldom prohibitive and the deterrent effect of the application process
which employees witness may be as useful as the actual ability to make
claim on the bonding company for actual employee theft.
Warning Signals Of Management Employee Theft
(the national association of certified public accountants) standing
subcommittee on methods, perpetration, and detection of fraud has
compiled the following preliminary list of conditions or events
which may signal the possible existence of a fraud situation.
1. Highly domineering
senior management and an ineffective board of directors and/or audit
2. Indications of
management override of significant internal controls.
3. Compensation of
significant stock options tied to reported performance or to a specific
transaction over which senior management has actual or implied control.
4. Deterioration of
quality of earnings evidenced by decline in the volume or quality of
sales for example.
5. Increased credit
risk or sales at or below cost.
6. Significant changes
in business practices.
7. Excessive interest
by senior management in the earnings per share effect of accounting
8. Business conditions
that may create unusual pressures:
9. Inadequate working
10. Rapid expansion of
a product or business line markedly in excess of industry averages.
11. A major investment
of the company's resources in an industry noted for rapid change, such
as high tech.
12. A complex
corporate structure where the complexity does not appear to be warranted
by the company's operations or size.
13. Widely dispersed
business locations accompanied by highly decentralized management with
inadequate responsibility reporting system.
14. Understaffing which
appears to require certain employees to work unusual hours, to forgo
vacations and/or put in substantial overtime.
15. High turnover rate
in key financial positions such as treasurer and/or controller.
16. Frequent changes
of auditors or legal counsel.
17. Known material
weaknesses in internal control which could practically be corrected but
remain uncorrected, such as access to computer equipment or electronic
data entry devises is not adequately controlled.
18. Incompatible duties
transactions with related parties exist or there are transactions that
may involve conflicts of interest or possible violation of the
announcements of operating results or future (positive) expectations.
21. Analytical review
procedures disclosing significant fluctuations which cannot be
reasonably explained, for example:
Material account balances.
Financial or operational interrelationships.
Physical inventory variances.
Inventory turnover rates.
22. Large or unusual
transactions, particularly at year-end, with material affect on
23. Unusually large
payments in relation to services provided in the ordinary course of
business by lawyers, consultants, agents, and others (including
24. Difficulty in
obtaining audit evidence with respect to:
Unusual or unexplained entries.
Incomplete or missing documentation and/or authorization.
Alterations in documentation or accounts.
25. In the performance
of an examination of financial statements unforeseen problems are
encountered, for instance:
Client pressures to complete audit in an unusually short time
under difficult conditions.
Sudden delay situations.
Evasive or unreasonable responses of management to audit inquiries.
Suspicions Versus Proof: Warning Signs But Be Careful
People who are
stealing from their employer will sometimes give clues that, in and of
itself, do not mean anything, but should raise suspicion. Care must be
taken as this is a very litigious and emotional area. A wrongly
suspected individual can sue...indeed, absent objective evidence a
rightly suspected individual can sue. One such horror story was told to
the writer by an accountant whose client was the owner of a convenience
store. He caught red handed a young male employee stealing and fired him
on the spot. That day, both the employee's parents confronted the store
owner, telling that the owner was wrong and mistaken, and threatening to
sue because the owner's allegations could ruin this young man's future.
The store owner knew what he had seen but the security cameras showed
nothing and it was his word against the young college student. His
attorney had to advise him that the risks were too great, the cost of
the matter to severe and to apologize. IF YOU HAVE A SUSPICION, DO NOT
TAKE THOUGHTLESS ACTION BUT CAREFULLY PLAN YOUR MODE OF ATTACK. Read our
for more tactics.
following is a list of suspicious situations concerning non management
call your business trying to find an employee.
standard of living increases, but the employee does not have the
earnings to support it.
on expensive vacations; buys a luxury car; buys a vacation house.
refuses to go on vacation.
performs bank reconciliation after work hours or at home.
Typical Methods of Embezzlement: Ways Cash and Checks Disappear.
The true test
of a person’s morality is what would he or she do if he knew he or she
would not get caught. This proverb is probably older than time
immemorial, and is immortalized in Plato’s Republic with the question
posed as to what a person would do if he or she was invisible and could
accomplish any crime they wished.
become a religion for many people…and cultures…and the simple fact is
that one must concentrate on protecting one’s assets from those whose
main goal in life seems to be to increase wealth by any way they can.
employees can achieve access to company assets greatly increase when
cash is used in the business, as any retailer knows. But even in locales
not traditionally used to having cash payments, there are ways to
obtain access can be developed by dishonest but inventive employees.
In a small
doctor's office, right after the doctor finished with the patient, the
bookkeeper would offer a 5% discount if the patient paid with cash. The
patient's bill and the cash paid was never recorded.
doctor's office, the bookkeeper pocketed part of the cash payments and
recorded a credit to the patient's account as a write off or insurance
A person who
worked solely in accounts payable created a fictitious office supply
company and would submit a small invoice to the company.
who prepared the bank reconciliation for an importer obtained a company
check. She made the checks payable to herself and found someone to forge
who printed the computer checks, would keep an unprinted check from the
check runs. He made the checks out to himself and for personal expenses.
The bookkeeper also did the bank reconciliation and kept the general
automobile service center, the manager would write up the service
tickets. One of the questions he would ask was, "How are you going to
pay?" If the customer said "cash," the manager would pull a service
ticket from the bottom of his clipboard. Since all service tickets were
pre-numbered and accounted for each day, the manager used a service
ticket for the cash sales that had a number no one would look for. The
cash from these sales were pocketed and the service invoices were
person submitted petty cash vouchers for hardware purchases for his own
Conclusion: Being Alert
signposts above have one thing in common: after the fact the victim was
always embarrassed that such “obvious” signs were ignored or that such
simple devices to steal were not easily discovered quickly.
The problem is
time and trust, of course. We do not have time to be paranoid about our
own coworkers and employees and want to trust the people we work with.
As once client put it, “I don’t want to work in an atmosphere of doubt
My answer to
him is my advice to all readers of this article: “You already live in an
atmosphere of doubt and distrust. The average American suffers a
property crime once every two years. It is part of our way of life. And
America does not stop at the door to your office. You protect your
possessions from thieves outside the office. You have to protect your
possessions inside the office or you will inevitably be a victim.”
should also review our articles on
Criminal Law and