Think Small, Lose Big

Protus3 Fraud


Note: The following paragraph is an amalgamation of several recent RMA cases. Names and circumstances have been modified, combined, or altered to protect the privacy of our clients.

John unlocked the front door of the office and headed straight for the break room for his second cup of the day. A plate of homemade cookies sat next to the coffee, and he realized that Jane must already be at work. Her dedication to the job was admirable, yet she always seemed to find time to do those extra things that made people feel special. On his way back to his office, he noticed a birthday gift on Mary’s desk. Jane must have left that as well. John entered his office, dropped his bag on the floor, and began sifting through the piles of paper on his desk that never seemed to shrink. On top of the pile was the P/L from the previous month that he had been scrutinizing late the night before. Usually Jane handled the details, but with the way the economy had been, he felt the need to take a closer look. Some of the documentation looked a little off, and he reminded himself to ask Jane yet again for the relevant files. Finance and accounting were not his strengths, and he relied on her to run that part of the business and explain it to him when needed. Last month, however, something just seemed off. Income was slightly down, but the expenses seemed strangely high. John sighed, fearing that he would have to deny employee requests for raises for a third time. He frowned as he noticed an entry for a payment to a vendor he did not recognize. There was another, and another, and the amounts seemed a little high. As he looked through the reports before him, an uneasy thought began to creep into his mind. Was something wrong happening here? He dismissed the thought as irrational paranoia. The only person with enough skill was Jane, and he trusted her implicitly. This was a small business, and they were like family here. He dug through his desk and found the reports for the previous two months. They had the same pattern, and his uneasiness grew. What if Jane had been stealing from the company?

Unfortunately, the scenario described above is not unique or unusual. Employee theft and embezzlement has always been a problem, especially for small businesses, and some experts believe the problem may be increasing in today’s economy. RMA has recently assisted several clients with this problem. Although not comprehensive, the information below is intended as a starting point to recognizing and preventing embezzlement.

What conditions make embezzlement easier?

  • Little to no oversight, especially of a trusted employee. Oversight could be provided by an immediate supervisor, a supervisor at a higher level, or an outside third party such as an accountant or auditor. In addition to making embezzlement more difficult, oversight provides an opportunity to examine the standard accounting process for errors or inefficiencies. In our recent cases, the thefts were discovered by supervisors taking a closer look or by new employees learning the process.
  • A large amount of available petty cash. Petty cash should be kept to a minimum for several reasons, not just potential misuse. Simply from a security standpoint, it may be unwise to have a large amount of cash in an unsecured office or desk. Allowing employees to have access to ready cash is sometimes too tempting to resist. Company credit cards are a good alternative to petty cash and provide an opportunity for oversight when reconciling the statements. If petty cash is used, receipts should be mandatory and the reconciled frequently. One of our recent cases involved a significant manipulation of petty cash.
  • A trusted employee in a family atmosphere. This seems like an ideal situation, but no employee should ever be trusted to the point where their work is not subject to evaluation and scrutiny. Speaking from personal company experience, our Vice President has been the model of integrity for our company since she started in 1991. She has Secret clearance from the Department of Defense and is our Facility Security Officer. She is beyond reproach, and her trust is not questioned. Although she is responsible for all accounts payable and payroll, the bank statements are only opened and reviewed by the company President who provides oversight of the process. In our recent cases, the thieves were highly respected members of the organization who were thought to be incapable of embezzlement.

What are some common characteristics of the thief?

  • An exceptionally dedicated employee. Working late or arriving early provides an opportunity to work without supervision. By never taking a vacation, the thief reduces the chance of discovery by a replacement. An employee who volunteers to go to the bank to conduct transactions on behalf of others may be hiding a crime. Each of our recent cases involved a suspect who used at least one of these methods.
  • Someone who seems to live beyond their means. The thief is spending the money they should not have in ways that are not typical. This could be gifts, sometimes lavish or expensive, for family, friends, and coworkers. The embezzled money could be spent on the home, clothing, or furnishings, or on vehicles including cars, boats, RVs, ATVs, or similar items. Sometimes the thief may lend money to family or a friend in need. If questioned, this unusual freedom with money is often explained as an inheritance or other unexpected windfall. Although each suspect spent their ill-gotten gains in different ways, all shared a common trait of spending more money than they seemed to have.
  • A person with a history of embezzlement or other issues. If they have stolen once, chances are they will steal again. With new employees, the first line of defense is a pre-employment background investigation. Some previous incidents of embezzlement may not have resulted in criminal prosecution, making a civil record search for anomalies even more important. In addition, previous employment references may provide direct information or indirect clues about the circumstances surrounding the termination of employment. Of our recent cases where the employee was a relatively new hire, the thief had been suspected of embezzlement at a previous employer. No pre-employment background investigation was conducted.
  • Someone who is everyone’s friend. The thief may be trying to avoid suspicion by making sure that everyone thinks highly of them. If someone is your friend, you find it harder to believe that they would steal from you. They may also be trying to solicit help from unknowing accomplices to manipulate some part of the system over which they have no control. This could involve requesting “help” on the computer to “fix an error” or requesting assistance on an unusual task. The suspects in our recent cases were described as friendly, well-loved members of the organization.
  • A person who routinely operates outside the system, especially related to computer software. Many companies operate using an accounting system or software that requires some form of modification. It is understood that certain changes are required to meet the needs of the business, for example if an error needs to be corrected or an entry needs to be legitimately changed. Frequent changes and “fixes” provide opportunities to insert fictitious “fixes” to hide embezzlement. All of our recent cases have involved a suspect who manipulated the accounting software to hide their embezzlement.

What can a company do to minimize the risk?

  • Provide internal oversight and review. Many companies have some form of control in place, but these controls must be periodically evaluated for appropriateness, effectiveness, and compliance. Require two signatures on checks, and do not allow the use of a signature stamp on checks. When reviewing information, do not just skim the information and “rubber stamp” the process. If something seems suspicious or unusual, ask questions and investigate. The thieves in our recent cases all took advantage of a lapse in internal oversight.
  • Provide external oversight and independent evaluation. An outside auditor or accountant providing review services will make embezzlement more difficult. In addition, outside oversight provides an opportunity to evaluate the entire system and suggest improvements that may benefit the financial situation of the company. As with internal oversight, it provides an opportunity to discuss the function and health of the business as well as future plans for growth. It can be difficult for a small business to hire an outside auditor or accountant, but this service is highly valuable.
  • Create and follow sound policies and procedures. Companies may create good policies and procedures, but they are useless if not followed or updated as conditions change. As businesses change, process should change and evolve to meet the needs of the business. If a new vendor needs to be added to the system, for example, require approval from a supervisor to complete this task. When entries are changed, require approval for this process. Separate accounting functions and cross train employees in different tasks to minimize one single person having control of the accounting process. Periodically evaluate the entire accounting process for compliance with established policies and procedures. In all of our cases, the suspect conducted activities considered “normal” that were contrary to written policies and procedures.
  • Use the appropriate tools and technology. If the accounting software is not appropriate for the company, modify it to make it work without a great deal of manual intervention. Create a process and method for changing entries that produces a record that is examined for accountability. Provide training to employees and supervisors to make them familiar with the abilities and limitations of the system. If not using accounting software, make sure that the paper system is organized, straightforward, and clear. In all of our recent cases, the suspect took advantage of a “glitch” in the system.

If you suspect embezzlement, contact a professional who specializes in addressing those situations. This could be a forensic accountant, an attorney, or an investigative company.


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Protus3 specializes in security system design, security consulting, corporate investigations and other investigative services. Partner with Protus3 and we will examine each situation to identify threats and develop solutions for your best outcome.

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