Embezzlement: You need to know how it works and how to prevent it

July 30, 2013 Written by

It has been said that if fraud were a country, it would be the fifth most productive country in the world.

Whether this is true or not, fraud is responsible for crippling many businesses.

Embezzlement is a huge part of the fraud industry. Because the crime is being committed by a trusted employee, it often goes undetected for long periods of time, if ever.

What are some of the most common forms of embezzlement, and how does the business owner protect his company against such thievery? Here are a few common methods of embezzling.

* Cash. In businesses such as bars and restaurants, an employee can simply fail to ring up a sale and pocket the cash. Using receipts that are sequentially numbered can put a road block in the embezzler’s way.

* Kiting. Check kiting takes advantage of the “float time” between when a company check is written and when it clears the bank account. The embezzler writes a check to himself and deposits it in his account. He can then write a check against his new balance back to the employer’s account. The size of the back and forth checks can continue to increase in size. Improved banking technology has reduced float time, making kiting less attractive for an embezzler.

* Lapping. A payment received from customer A is deposited in the embezzler’s account. When customer B makes a payment, the thief records it as a payment by customer A. Likewise, when customer C pays, his payment is credited to customer B. Unchecked, lapping can escalate into huge amounts of money. This scheme requires that the employee take little or no time off. He can’t afford to have someone else handling his paperwork.

* Fake refunds. Fake refunds can take different forms. A refund is issued to a customer but the funds go directly to the employee in charge of issuing refunds (often the only office employee). Or the employee overpays an invoice or the payroll tax deposits and pockets the refunds when received.

The smaller your company, the more vulnerable you are to fraud. The reason is the lack of separation of duties. If one employee is responsible for enough different money handling functions, the company is ripe for the picking.

So, what does a business owner do? Separate some of the duties. The owner may need to step into a couple of the cash-handling functions or outsource certain duties. For example, the owner should always open and review the bank statements. On a random schedule, the owner should review a few customer transactions from billing to collection to the deposit into the bank.

Having your accountant do an “internal control” review is another good idea. That will include a look at who does what on a daily basis and which duties need to be assigned to different employees to help prevent employee theft.

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Written by: Doug Rodrigues