School Employees Embezzle Funds Even During Hard Financial Times: What Can You Learn for Your Organization?

Stealing company money.jpgWhen times are tough, shouldn’t everyone do their part to help out? Unfortunately, employees motivated to commit fraud jump on any opportunity to take advantage of lax financial controls within an organization. In a county in West Virginia, the school district had faced a budget deficit for many years. More than 70 employees had been laid off as the school administration struggled to find ways to balance the budget.

To add insult to injury, a recent news report revealed that school officials are now investigating a possible employee embezzlement scheme that has siphoned off more than $20,000 from the district, the biggest embezzlement case in Boone County, West Virginia, in more than a decade.  The Transportation Director and a school mechanic are accused of purchasing things for personal and business use with fraudulent invoices and charging them to the school transportation department over a two-year period.

How could these employees have gotten away with their scheme for so long? This happens across the country as trusted employees find themselves caught in a fraud triangle, with the opportunity, pressure and rationalization to steal from their employer.

Here are some takeaways we can learn from this employee embezzlement story to help your organization avoid a similar situation:

  • Vendor background checks. Know who your vendors are before doing business with them.
  • Review invoices. Implement procedures for reviewing and approving invoices. Different people should receive and pay the invoices.
  • Checks and balances. Even directors should have checks and balances. Ironically, the most trusted, high-ranking and long-time employees are typically the ones who commit fraud.
  • Surprise Audits. Perform surprise audits and let employees know that this is standard procedure. Fear of being discovered may effectively neutralize the opportunity component of the fraud triangle, preventing embezzlement schemes from happening in the first place.
  • Tone at the Top. Implement policy and procedures that everyone follows, starting at the top. Even the highest level official should be open and transparent about financial matters, allowing others to check and monitor their work.

High-ranking employees are trusted, but sometimes they abuse that trust and commit fraud. For more information on preventing fraud in your organization, contact Mike Rosten, CPA, CFE.

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Employee Embezzlement – Is the Scrap worth it?

Scrap metal.jpgAll employers want to trust their employees, but once again we see a case of the employees giving employers a reason not to trust them. In this recent article (Four indicted with embezzling $380,000, Stacy Hairston, The Franklin News-Post, March 10, 2017), we read of  four men indicted on a total of 194 felony embezzlement charges.  Their scheme, which netted approximately $2,000 per charge, was uncovered when the company they worked for contacted the Franklin County Sheriff’s Office to look into discrepancies on deliveries made to a scrap company.  The investigation revealed evidence that the men would use company trucks to deliver the scrap, but receive checks for the scrap in their personal names, not that of the company.  The investigation also revealed that the scheme had been going on since 2013.  That’s a lot of scrap!

Luckily, the owner suspected that not all the scrap generated was being properly accounted for, resulting in either unexplained shrinkage of inventory or possible diversion of cash receipts.

Some lessons that can be learned from this case, and tips to prevent something similar from happening at your company, follow:

    • Only authorized personnel should be allowed to remove and deliver scrap. The person transporting the goods should not be in charge of selling them. Also, the duties involving buying and selling should be segregated.
  • Request signed delivery receipt from the scrap company. This would enable both parties to a scrap transaction to better control the purchase and sale, respectively.
  • Check and sales receipt returned to office, the same day. There is no reason for lost/misplaced checks or sales receipts, especially when affixing responsibility the day of each expected transaction.

 

  • Make employees accountable for company property by establishing expectations. Require that personnel record the date, time, employee and approximate weight of scrap taken to the scrap company and that they will be returning with sales receipts and/or checks received.
  • Keep a record of company property to be disposed of as scrap. Keep a control listing of those items identified for sale as scrap, based upon pre-established approvals. This could be more difficult based upon the definition of inventory versus parts or components. Controlling components may have less perceived benefits, particularly if leftover pieces and parts separated from bigger inventory items have only minor value.
  • Keep a designated area to track items waiting to be sold as scrap. By keeping all the scrap in one area, it is easier to gauge the quantity and enhance control efforts.

Diverting a revenue stream is not a common fraud scheme, but it does happen. In this case, the scrap was cumulatively significant in amount and the employees took advantage of the lack of company controls to make some money on the side.  If you think your company may be facing a similar revenue diversion scheme, contact Certified Fraud Examiner and CPA Mike Rosten.

Does Your Business Rely on Luck to Uncover Employee Fraud?

Lucky in Fraud-WordsIn celebration of St. Patrick’s Day and with a nod to the Emerald Isle, some will wear green, some will eat corned beef and cabbage and many will go to the pub for a pint of libation (preferably green in color). All will be hoping for some ‘luck of the Irish.’

Hoping for luck on St. Patrick’s Day is one thing, but planning to rely on luck is especially unwise in the business world.

Luck doesn’t help you determine your marketing plan, your operating budget or your growth strategy, so why should it be the main method of detection for employee fraud schemes?

In the 2016 Report to the Nations, the Association of Certified Fraud Examiners (ACFE) estimates nearly half (approx. 45%) of the initial detections of fraud by employees is a matter of luck. This occurs in many ways, including happenstance, mistakes by the employee and unsolicited tips. While tips were the largest category reported by the ACFE, most tips were unsolicited and unanticipated – a lucky break for an employer losing money to a motivated employee with the opportunity to embezzle funds.

How could luck play a role in discovering employee fraud? In one case, an employee’s primary responsibilities included posting time and preparing payroll disbursement summaries. Because of weak internal controls, he was able to create non-existent employees (aka “Ghost Employees“), which would appear as actual employees on the company’s records and were issued paychecks. The fraudster would direct the checks to P.O. boxes he controlled; thereafter, he would retrieve and cash the Ghost Employee checks.

The fraud was uncovered during a testing of the payroll account. The fraudster had buried the Ghost Employees deeply into the system and consequently he was comfortable they would not be discovered. During the testing, the reviewer “got lucky” and discovered some phony documents created by the fraudster for filing in the Ghost Employee files. However, after the phony document discovery, it was realized that clues had been everywhere, such as arbitrary employee names, mis-matched social security numbers, and no taxes withheld for the Ghost Employees.

There are numerous ways to prevent and/or uncover employee fraud in the workplace which do not rely on luck. Many of these methods are free or cost very little for the company to implement.

One of the most important fraud deterrence methods is the “tone at the top.” The tone at the top has been described an “ethical atmosphere that is created in the workplace by the organization’s leadership.” Typically whatever tone is set by management will ultimately become the tone of the company and many of its employees. A groundbreaking study commonly known as the Treadway Commission found that “tone at the top plays a crucial and influential role” in creating the environment regarding fraud within a company. Whether highly ethical or not at all, employees will typically follow the lead.

Generally, in setting the proper tone, owners/managers should take, at a minimum, the following four steps to create an ethical climate within the organization:

  • Communicate what is expected of employees
  • Lead by example
  • Provide a safe mechanism for reporting violations
  • Reward integrity

The resulting ethical climate should minimize occupational fraud risk, and simultaneously increase the likelihood of discovering the occurrence of occupational frauds.

Having a plan to detect fraud within your company is always better than hoping a lucky break or tip reveals the problem. If you’d like help with a fraud checklist, contact Mike Rosten, CPA, CFE at mrosten@pbtk.com or 702-384-1120.

Cooking the Books

Businessman cross finger .conceptWhat’s the most costly type of white collar crime? On average, a company is likely to lose more money from a scheme in which the financial statements are falsified or manipulated than from any other type of occupational fraud incident. The costs frequently include more than just the loss of assets — victimized companies also may suffer lost shareholder value, lower employee morale, premature tax liabilities and reputational damage. Let’s take a closer look at what’s at stake when employees “cook the books.”

Low Frequency, High Cost

The Report to the Nations on Occupational Fraud and Abuse published in 2016 by the Association of Certified Fraud Examiners (ACFE) found that less than 10% of the fraud schemes in its survey involved financial statement fraud. However, those cases clocked the greatest financial effect, with a median loss of $975,000. Compare that amount to the median losses for asset misappropriation ($125,000) and corruption ($200,000).

What makes financial statement fraud especially problematic is that the costs can quickly snowball out of control. For example, when an executive fudges the numbers to make a company appear more profitable, the company will likely incur greater liability for taxes or dividends.

Plus, it might be necessary to take on debt to make those payments, leading to higher interest costs. Or an acquisition of a healthy company might be pursued to hide the actual underperformance. In the end, more fraud may be necessary to pay for the original scam.

Common Schemes

The ACFE defines financial statement fraud as “a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Common ploys include:

  • Concealed liabilities,
  • Fictitious revenues,
  • Inflated asset valuations,
  • Misleading disclosures, and
  • Timing differences.

Revenue recognition is a particularly ripe area for financial statement fraud, especially as companies start to implement the new revenue recognition guidance for long-term contracts. Early revenue recognition can be accomplished through several avenues, including 1) keeping books open past the end of the accounting period, 2) delivering products early, 3) recording revenue before full performance of a contract, and 4) backdating sales agreements.

Preventive Medicine

Victims of financial statement fraud often find their long-term survival severely threatened in a relatively short period of time. Hiring an outside forensic accounting specialist to evaluate internal controls can help identify red flags, ferret out ongoing schemes and deter would-be fraudsters. Also, an awareness of the actual reasons and methods for manipulating financial statements would likely be important. Contact Mike Rosten, CPA, CFE for more information on how to evaluate your internal controls to help prevent employee fraud.