Every single day we may become victims of fraud, whether due to irreparable harm done to businesses in our communities or in the more subtle ways that corporate fraud trickles down to the consumer. For example, higher prices on goods and services, mistrust in elected officials or public employees, or an increase in government red tape. Regardless, the cumulative cost from fraud is enormous, whether from corruption, financial statement fraud, or asset misappropriation. The Certified Fraud Examiners (CFEs) that participated in the 2016 Global Fraud Study estimated that the typical organization suffers loses equal to 5% of revenues in a given year due to occupational fraud.
Two recent cases of embezzlement covered in the media have involved a trusted, long-time employee with jobs in a financial position. Both parties in each case pled guilty, though the fraud perpetrators themselves may have unintentionally been encouraged by the good intentions and optimistic outlooks of responsible parties, leading to ineffective or complete absence of oversight mechanisms and internal controls that could have prevented or detected the employee fraud.
- The first case comes out of Alabama where a former Chief Financial Officer and CPA diverted customer payments for nine years, embezzling $11.2 million from his employer, Strickland Trading, a scrap metal brokerage company.
- The second embezzlement involves check disbursements and credit card abuse within the Welcome Fire Department in North Carolina. A trusted member of the community and the department’s former treasurer stole $353,000 in government funds over a five-year scheme.
The common thread between these two embezzlements is that the perpetrator was situated in the finance or accounting department, which jointly account for 21% of the cases reported in the 2016 Report to the Nations on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners (ACFE). In addition, each of the perpetrators was in a position of trust within the victim organizations, with the former Strickland Trading CFO having a 25-year tenure with the victim company and the former Welcome Fire Department Treasurer having a 30-year tenure as a teacher in the community.
Effective oversight may have acted to prevent these asset misappropriations, thereby limiting or preventing financial losses to the victims and protecting the perpetrators from their own unfortunate tendencies.
As reported in the news, here are brief summaries of the embezzlement investigations with suggestions for how each organization may have added additional controls to help prevent these cases of employee fraud:
Strickland Trading: In 2007 the former CFO formed an entity with a very similar name to his employer, but this company was an LLC instead of an Inc. He also distanced himself through an associate who was involved with the LLC. This enabled him to intercept 225 checks from the true Strickland Trading Inc. and deposit them into a bank account for the LLC, which was under his separate control. He used those funds for personal purposes including buying real estate and automobiles, and concealed them with false entries into the accounting records.
What Could Have Prevented the Fraud? Suggested general preventative internal controls include those over sales entries, general ledger access and physical safeguarding; including proper segregation of duties and independent reconciliation processes. Additionally, the incoming mail could be opened by a neutral party and checks independently listed to establish the existence of customer payments received. Other effective procedures may involve analysis of unusual/unexpected gross profit and cost of goods sold ratios, along with identification of bad debt write-offs of accounts receivable and corresponding confirmation with customers.
Welcome Fire Department: The former Treasurer wrote over 100 checks made out to herself or members of her family and misused credit cards during her tenure, which she attempted to conceal in the accounting records. She used the funds to pay bills, student loans and credit cards, and to take multiple vacations and “shopping sprees.”
Since the perpetrator apparently prepared and signed checks herself, there arguably would not have been a need to conceal the payee or forge an authorized signature on the issued checks. Further, she failed to enter the “personal” checks into the accounting system or the checks entered did not match up with monthly reconciliations presented to the accountant or the Board.
What Could Have Prevented the Fraud? In these situations, performing or reviewing bank reconciliations may be an effective preventative measure. Further, to make it more difficult to hide the embezzlement, companies can trace monthly disbursements between the bank statements, cancelled checks and general ledger/bank reconciliation, including propriety of the payee, amount and endorsement. Anomalies arising from such verification procedures would likely have led to more thorough analysis and investigation, resulting in earlier fraud detection. Other effective procedures may involve review of credit card statements and underlying support to identify personal transactions.
If your organization is currently not using the suggested internal controls suggested in the two cases above, talk to an accountant about how you can create an environment that fights fraud. If you suspect a problem with an employee who has the access, ability and motivation to commit fraud, you may contact me, a CPA and CFE, to investigate potential employee fraud.