Preventing and Detecting Employee Theft and Embezzlement E-Book

Stephen Pedneault

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Professional Advisory Services
• Sprache: Englisch

Seitenzahl: 372

Veröffentlichungsjahr: 2010

Beschreibung

"If you don't think that some employees have figured out ingenious ways to steal from businesses, read this book. The real-life examples will change your mind." --Joseph T. Wells, CFE, CPA, founder and Chairman, Association of Certified Fraud Examiners "An easy-to-read, but comprehensive step-by-step approach that covers every potential area for employee fraud and embezzlement. Great checklists at the end of each chapter show what steps to put into place for controls and protection. Includes real-life examples that really 'bring the story home.' " --Jean L. Conover, CPA, past CEO/CFO, Jefferson Radiology PC "This book is a must-read for seasoned entrepreneurs as well as those considering entering their own business venture. While developed for small business, the risk detection and prevention methodologies presented by Mr. Pedneault are universal to all businesses. The concise checklists provide ready guidance for establishing a complete system of controls."--Denise H. Armstrong, CPA, Chief Financial Officer, Sea Research Foundation, Inc. d/b/a Mystic Aquarium and Institute for Exploration "This book is a must for every individual owning their own business. Mr. Pedneault clearly articulates the fraud risks that occur in each business system. In the book, he offers practical advice for internal controls and illustrates the risks with real-life examples."--Leonard W. Vona, President, Fraud Auditing, Inc.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

Acknowledgements

Introduction

CHAPTER 1 - Hiring the Right Employees

Disclaimer

Where Do You Start?

Advice of Counsel

Application Policy

Due Diligence

Personal Information

Past Employment

Education

References

Criminal and Civil History Checks

Credit Checks

Hiring Time

Notes

CHAPTER 2 - Know Your Employees

Why Is Knowing Your Employees Important?

Open Communications

What Should You Watch for in Your Employees?

Note

CHAPTER 3 - Sales, Cash Receipts, and Collections

Here’s Where Everything Starts

Recording and Tracking Sales

Collections

Debit Memos and Other Adjustments

Accounts Receivable

CHAPTER 4 - Credit Card Sales, Transactions, and Merchant Statements

Processing Sales

Reconciling Sales

Processing Refunds or Credits

Reviewing and Reconciling Refunds or Credits

Reviewing and Reconciling the Merchant Statement

CHAPTER 5 - Purchases, Cash Disbursements, Checks, and Petty Cash

Purchases

Cash Disbursements/Checks

Unpaid Bills/Accounts Payable

Petty Cash

CHAPTER 6 - Credit Cards and Debit Cards

Credit Cards

Debit Cards

CHAPTER 7 - Employee Expense Reimbursement

Expense Submission

Where Are the Abuses?

Payment Processing

Notes

CHAPTER 8 - Electronic Banking

Traditional Banking (In-Person Deposits and Manual Check Writing)

Check Processing and Clearing Changes

Changes in Bank Deposits

ATMs

Online Banking

What Can You Do?

CHAPTER 9 - Payroll Processing

Payroll Administration: Adding/Changing/Terminating

Payroll Processing

Payroll Tax Returns

CHAPTER 10 - Inventory Issues and Controls

Prevention: Good News and Bad News

Retail Businesses: Items Available for Sale

All Businesses: Items for Use by Employees (Supplies, Tools, and Equipment)

Detection

Note

CHAPTER 11 - Bank Statements, Canceled Checks, and Reconciliations

Bank Statements

Investment Account Statements

Canceled Checks

Bank Reconciliations

CHAPTER 12 - Financial Reports

Generate Financial Reports Regularly

Why Is the Regular Review of Financial Reports So Important?

When to Consider Outside Advice and Assistance

CHAPTER 13 - Safeguarding Your Bookkeeping or Accounting Systems

Manual Bookkeeping Systems

Computerized Bookkeeping and Accounting Systems

QuickBooks Users

CHAPTER 14 - Prevention, Detection, and Insurance

Timing Is Everything

Adequacy of Coverage

Disclaimer

CHAPTER 15 - Your Response to an Identified or Potential Issue

A Dreaded Day of Discovery

Due Diligence on the Discovery

What If It Appears to Be Fraud?

APPENDIX A - Embezzlement Controls for Business Enterprises Lester Amos Pratt, CPA

APPENDIX B - Who Was Lester Amos Pratt?

About the Author

Index

Copyright © 2010 by Stephen Pedneault. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Pedneault, Stephen, 1966-

Preventing and detecting employee theft and embezzlement: a practical guide/Stephen Pedneault. p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-54571-3 (cloth)

1. Employee theft—Prevention. 2. Employee theft. 3. Embezzlement—Prevention. 4. Embezzlement. 5. Employee crimes—Prevention. I. Title.

HF5549.5.E43P43 2010

658.3’8—dc22

2009054062

To all my clients, past, present, and future, who allow me to help guide them through the maze of money, piecing together financial puzzles during the good times and when things appear at their worst.

Preface

This book was inspired by a small business owner whose story follows in the introduction. He is referred to as Jeff, and in my more than 22 years of professional experience as a certified public accountant and certified fraud examiner, I have dealt with hundreds of small business owners similar to him. Not every owner was a victim of fraud or embezzlement, but many of them shared common traits. They were excellent in regard to the products they sold or the services they provided. They were very busy, working long hours to ensure their companies were, and remained, successful. They recognized their lack of financial knowledge, sophistication, or their busy schedules, so they hired someone else to handle the financial aspects of their business. They failed to implement proper controls and delegated too much of their bookkeeping and accounting to someone else. And in many cases, they fell victim to the individual they entrusted with the financial aspects of their businesses.

Jeff’s case inspired me to seek out any resources that were available designed specifically with the small business owner in mind. I was looking for resources beyond generalized articles concerning preventing employee theft and embezzlement, but rather books or guides to identify specific steps and measures small business owners need to implement to better protect the finances of their businesses. Also, I wanted to find books or guides written for owners with varying degrees of financial background and experience, concepts, concerns, and recommendations that were easily understood and ready for implementation in most contexts. Translated using Jeff’s terminology, these sources would tell me the things I should be concerned about as a small business owner with employees, and tell me what I would need to do to have the proper financial controls in place.

In my quest, I discovered a used book available online that described exactly what I was seeking. The price concerned me, a mere 12 cents, and I wondered how good a used book could be if it cost so little. It seemed as if someone was simply trying to get rid of it, and if they thought it was only worth 12 cents, then.... So I bought it. The shipping cost was 4,000 percent more than the book (still under $10). It was the best $10 I have ever spent. The book, Embezzlement Controls for Business Enterprises, was a great find—I discovered someone had written the very book I was seeking. The author had managed to cover the major areas of concern in just 31 pages, and he was right on with his recommendations. Many were applicable to situations I am involved with, even though the book was last published in 1952.

The author’s name is Lester Amos Pratt, and throughout the writing of this book, I have done much research on his life. Lester’s book has been reprinted with permission in Appendix A, with the exception of one chapter, and more about his life and accomplishments can be found in Appendix B.

The goal of this book is to deliver a readable, practical resource geared specifically to help very busy small business owners implement key controls and procedures to better protect themselves from employee theft and embezzlement. This book is designed to allow busy small business owners to read one chapter at a time and, using the checklists at the end of each chapter, begin to implement within their business the applicable measures provided, just as Jeff did, as told in the introduction.

Following a schedule of reading one chapter at a time and implementing associated changes within your business, a complete implementation covering all the financial areas would be limited only by the pace at which you read each chapter. If you complete one chapter each night—a realistic goal for many small business owners—you could accomplish a total evaluation of the financial policies and procedures within your business in less than two weeks. Regardless of the pace you follow, as long as you continue through each chapter and apply the information to your business, you will be better able to prevent and detect employee thefts and embezzlements.

Once completed, this book should serve as a guide to monitoring the financial policies and procedures within your business going forward. The discussions contained in the chapters are specific to small business settings yet general enough to be applicable in most contexts. In some cases more detailed and specific controls, policies, and procedures would likely be warranted. For this reason, this book and the information provided within it should not be held as absolute but rather used as a general guide.

Acknowledgments

To my family, who watched with eagerness as I completed writing this book—my third in less than a year—anxiously awaiting the return to normalcy in my evening and weekend schedules while patiently and quietly listing all the things I now need to address that I have neglected for the past year due mainly to my writing.

To all my friends, colleagues, and trusted advisors, who continue to stand by me, offering me invaluable insight and advice to allow me to make informed decisions. I value the relationships I have built with each of you and look forward to a long and successful journey enjoying our successes.

To Helen Koven, my friend, publicist, and literary agent, who thought getting a book published was a really good idea, having two books published in a year was a great idea, and completing three books in the same year meant we were just out of our minds. Thank you for all your help and support—clearly there is no way I could have done any of this without your guidance, experience, and expertise.

To Timothy Burgard, Andy Wheeler, Stacey Rivera, Todd Tedesco, Laura Cherkas, and all the folks at John Wiley & Sons, who extended me the opportunity to write three books within a year. I look forward to growing our relationship with future endeavors.

To the Association of Certified Fraud Examiners, the leading international organization on fraud that pioneered credentialing and training opportunities for fraud prevention and investigation professionals worldwide.

And to all the fraud professionals around the globe, preventing and investigating financial crimes of one kind or another. Although we may come from different backgrounds and work within different contexts, I believe we all share the same goals and commitments to promoting ethical and honest behavior with the guarantee of realistic consequences for crossing the line—even once.

Introduction

A colleague called to let me know he had provided my name and contact information to someone who might need my help.

A week later I received the call. It was a Tuesday morning in December, and I was working in my office. It was the first time I had been at my desk in over a week. Things had been busy in the world of fraud, and much of my time was spent out in the field putting cases together. From an embezzlement perspective, things were definitely good for my business. As for the victims, it was just another sign of the sad state of our society. The holidays can cause an increase in people stealing, and that certainly was the case for the current year.

The caller, whom I will refer to as Jeff (not his real name), said he was given my name by his accountant, a colleague of mine. He said he thought he had a problem within his business and wanted to meet as soon as possible. I asked him how urgent our meeting needed to be, and he asked me what I was doing that morning. Sensing the anxiety in his voice, I asked him if he had his morning coffee. He said he had a cup earlier but could use another. I offered to meet him and listen while he told me a little about what was happening.

I asked him where he wanted to meet, and he said somewhere where the meeting would not look suspicious. I told him I was dressed casually that day and that meeting me at a coffee shop could look pretty innocent. He said he had many customers in town and is recognized by someone almost everywhere he goes. He suggested we meet at a doughnut shop just outside the center of town. I agreed and asked how I would recognize him. He said he would be driving a commercial van with the name of his business on the sides, and provided me with the business name. I told him I was on my way; it was a 10-minute drive for me at best. I told him the make and color of my car and where I would be parked in the lot.

I arrived first and backed into a spot, watching for a commercial van to pull in. Within a minute or so the van arrived. I watched as the driver spotted my car and drove over to park next to me. He waved and rolled down his window. I asked him if we were going to meet inside, and he said he would prefer to meet in his van to avoid being recognized. I grabbed my pad and pen, and put them on the passenger seat of his van. I asked him if he wanted a coffee, and he said he was all set. I told him I wanted to get something and walked into the shop. I bought an apple juice and a chocolate doughnut, then headed back to the van.

As I took the cap off my juice, I asked Jeff to tell me what was happening and why we needed to meet.

He started by telling me that he owned a local service company, and had owned it for the past ten years or so. He had a partner who owned a small piece of the business; Jeff owned the majority of the company. Both he and his partner were employees of the business; he ran the service end of things while his partner was responsible for the finances. Jeff said that recently, as he reviewed financial records and documents, he noticed activity and transactions that were not authorized. One example was his partner charging gas on the company’s credit cards. Another example was his partner providing himself with an increase in compensation. Jeff said neither of these actions were approved or authorized by him. He said the worst thing he had discovered was that there were undeposited customer checks sitting in his partner’s desk waiting to be processed. While that may not be a bad thing by itself, his partner was complaining there was insufficient cash in the business to purchase new equipment that Jeff wanted in the service area. He said he had begun looking further into the finances but knew nothing about finances, let alone the accounting and bookkeeping for the business. His partner handled all aspects of those areas, including maintaining the computer systems and files.

It didn’t take me long to eat the doughnut, and by then I was ready to start asking some questions and taking some notes. Starting mainly with background information, I began to get a picture of the business environment. I asked if he thought his partner was aware that Jeff was looking into financial areas of the business, something that he had never done before. He said he didn’t think his partner was aware of anything and that he had been very careful to put things back exactly where he had found them and to leave as much undisturbed as possible. His partner hadn’t mentioned anything to him about his actions. He also said everyone was acting as they always did—business as usual. I asked him how much he found in undeposited checks; he replied that the customer checks he found totaled over $100,000.

I asked if he ever ran an accounts receivable report or had any sense of how much customers owed to the business. He said that too was an interesting question. He said his partner was always late in invoicing customers after work was completed, sometimes months later, and in some cases he thought the work was never invoiced. He also said he saw one accounts receivable report that included large balances well over 120 days old. In his line of business, his customers typically get invoiced once the service has been completed and pay within 30 days. He had no explanation why the billing to certain customers took so long and why their balances were so old.

As I listened to Jeff’s story, I pretty much figured his partner was committing some type of cash receipts fraud, quite possibly lapping (where customer payments are diverted by the employee and later payments from other customers are used to cover the diverted payments). This could explain the large outstanding balances and the undeposited payments sitting in Jeff’s partner’s drawer. However, the increase in pay and the charged fuel purchases made me believe there was a lot more happening within the business and that the customer payments were only part of the scheme.

Jeff said his main concern was the continuity of his business and that if a theft was occurring, any investigation within the company could not interrupt the servicing of his customers. I asked him to describe all the areas of responsibilities of his partner and any assistants in any financial areas of the business. Jeff described just what I had expected: His partner was in charge of all the financial areas of the business, beginning to end, with no internal controls and no segregation of duties. Jeff also described a newly created position, an assistant to his partner, a position his partner adamantly tried to prevent being created. He said the individual currently working in that position had been there only a few months.

I asked Jeff to describe any financial roles he had in the business, and as I expected, he had few to none. Jeff confessed that he was great in the service area, working with his service employees and with customers, and was also responsible for completing bids for new work. However, when it came to the finances, he didn’t have much time left over, and although he owned the majority of the business, he left the finances to his partner to manage.

Jeff also stated he wouldn’t even know where to start with establishing internal controls or understanding the finances of the business, and would look to someone like me to help him identify what things he should be doing as the majority owner of his company.

Over the next hour or so we hashed out a plan on how to approach the issues, conscious of his primary goal of business continuity, and I provided him with the names of a few attorneys I thought he should consider getting involved for legal guidance.

Within a week we met again at the law office of the attorney he contacted and reviewed the issues and the plan to ensure all legal aspects were covered.

Two weeks later the plan was executed. In the course of a few short days, Jeff had taken control of both his company and the situation, and business continuity was unaffected.

It was during the first day at the company that I told Jeff he would need to make some immediate changes within his business and implement procedural changes to begin establishing internal controls over the financial aspects of the company. Jeff handed me a pad and pen, and told me to create a checklist of all the things I thought he needed to do. I told him I could type them up and bring them in the morning, but he insisted that I simply write them out so he could start implementing them as early as that night.

He said he had a business to run and his area of expertise was strictly in the service field. He said that I clearly knew what was needed to turn things around quickly to provide him the necessary control, and that he would execute whatever I wrote on my list. He said he simply didn’t have time in his day to have meetings or read memos, but if provided a list with specific steps to implement, he could get those done.

I wrote out three pages of things he needed to change or implement. After I had completed it in the early evening hours of that first day, Jeff made a copy and kept the originals. He then took out a highlighter and asked me which measures he needed to implement immediately, meaning first thing tomorrow morning. I went through the list and pointed them out. He said once he had all the service staff out on their assignments for the day, he would work down the list and get as many done as practical by the end of the day.

By the end of day two Jeff reported back that he had completed all but one item on the list; the work had taken most of his day. He said he was added to the bank accounts, his partner was removed from all the bank accounts, the customer remittance address was changed to ensure he had sole control over all future customer payments, and so on.

In this case I was able to use my experience and expertise to have an immediate and direct impact on Jeff’s business, as I have with many other businesses. While I enjoy these projects and interactions with business owners, I find myself drawing on my experience and creativity for each and every engagement, with no documented guide applicable to a typical small business environment. Such guidance would help me ensure that I cover all aspects of each business every time in a consistent manner and would provide me with documentation I could leave with business owners at the end of an engagement to allow them to monitor and modify their policies and procedures in response to changes in their businesses.

From implementing prudent hiring policies and practices through collecting receipts, making deposits, writing checks, paying employees, and evaluating the adequacy of insurance coverage, this book covers the major financial areas commonly found in most small businesses and provides the owners with practical information and recommendations applicable to their business environments to prevent and detect instances of employee theft and embezzlement.

It all starts with hiring the right people, which is what follows in Chapter 1.

CHAPTER 1

Hiring the Right Employees

Disclaimer

As I begin discussing the importance of sound hiring practices, I want to highlight that I am not an attorney and by no means am I providing you with legal advice. In my opinion nothing replaces the advice of counsel based on their experience and expertise. The discussions that follow are based solely on my personal experiences during my more than 22 years of working with clients and counsel to prevent and resolve a wide range of employment-related issues, many of which stem from some type of theft or embezzlement of assets, money, proprietary information, or a combination of all three.