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“Thou Shalt Not Steal”

Exodus 20:15 KJV

I arrived in Charleston in 1978 with 5 years’ experience working for a CPA firm preparing financial statements and tax returns and was employed by the CPA firm of McKnight, Frampton, Buskirk and Co. here in Charleston.  When you have a new employee with some experience and need to put them to work, the easiest thing is to send them out to do audit field work.  That first assignment uncovered a really dumb thing done by a bookkeeper – she had the owner sign checks, supposedly for payroll taxes, but the payee was left blank.  She made them out to herself and deposited them to her bank account, how dumb was that!  The owner began getting penalty notices from the IRS for unpaid payroll taxes.  Thus was my introduction to what could be known as forensic auditing.
According to Barry Moltz in a 2013 article 7 Sneaky Ways Employees Steal and How To Prevent It 1

Most employees are very honest. But unfortunately, inside many companies, there are a few workers looking to steal money or products from the company. Employee theft costs U.S. businesses up to $200 billion in annual losses, according to one estimate by Tatiana Sandino, an associate professor in accounting and management at Harvard Business School.
A very real threat, employee threat can do serious damage to a small business’s bottom line. How can you prevent it from happening to you? Be aware of these all-too-common practices, so you know how to protect your business.

From article by Chad Brooks Published March 04, 2014 entitled Why do you think employee theft is so prevalent in small businesses?2

I think it is a matter of opportunity. Small businesses have fewer employees, and these employees may have a wide range of responsibilities within the business. With this responsibility comes knowledge of oversight mechanisms in place at the business, as well as knowledge of suitable targets for theft. An employee who becomes motivated to engage in theft has access, knowledge of guardianship mechanisms and knowledge of the target that allow them to be more successful in their crimes than non-employee offenders would be.

There are lots of ways to steal from a business, such as taking supplies, tools, inventory, time by inaccurate time records, and lots of other ways, but this discussion is specifically related to money.  Though there are certainly articles and books on the subject, I’ve chosen to draw from experience and real life examples.
Accountability – don’t leave the barn door open
The most responsible thing a business owner can do is insure that there are practices and procedures in place for accountability in handling money.  Just as important is to INSPECT the processes and let employees know someone checks behind them.  Random checks are particularly helpful.  And always LEAD BY EXAMPLE.  If the owners and managers are accountable to the systems in place, it creates a ripple down effect.  You actually honor your employees by putting procedures in place to put a damper on temptation for dishonest behavior.  Sort of like not letting your 13-going-on-25yo daughter go out on a date alone.
Let me count the ways
Let’s look at just some of the ways cash is handled in businesses and examples of systems to provide accountability.
Likely most businesses have a petty cash box or cash drawer in a cash register or point of sale system.  First, the petty cash box.  This is likely the most vulnerable and least accounted for.  You can create a simple log to record who takes money out with the date and amount.  And the flip side, REQUIRE receipts be turned in WITH CHANGE and record that on the log as well.  Then simply have a running balance of cash in the box and COUNT IT at least weekly with occasional random counts.  Cash registers and point of sale systems typically have a way to record all cash coming in and cash withdrawals.  Balance daily and require receipts for cash withdrawn.  Back to lead by example, do owners and managers just open the drawer and take out cash without recording it?  Employees see that as an open display of opportunity.
One layer deeper- who in your business makes up the bank deposits, who writes checks and who signs them?  Is there a signature stamp or software that prints a signature on checks?  Who opens the bank statements and who does the bank reconciliations?  In your business or organization, consider separation of duties.  It is best that one person not handle the money all the way through from making deposits, writing checks, and doing the bank reconciliations.  A procedure can be to have money, along with a daily balance report, given to a second person to make up the bank deposit.  Can someone reconcile the bank who doesn’t do the deposits or pay the bills?
Employees with access to blank checks can take checks from the middle of the stack or another box and write them.  One client of mine had a box of checks in an unlocked cabinet.  Someone took checks out of the middle so the break in number sequence didn’t show up until the bank statement came.
With the ease of creating real checks with a computer, a business may make a legitimate payment by check.  Someone can recreate that check, logo, signature and all, and write fraudulent checks.  One client had cancelled checks stolen from an armored car, how bizarre is that.  Someone reproduced their check and cashed over $30,000 in amounts less than $5,000, each at different branches of the bank where the account was held.  Why someone was dumb enough to walk into branch banks with security cameras and cash fraudulent checks is beyond me.
Talk with your bank to find out what protections you can put in place.  There are options like Positive Pay where you can submit a list of checks issued and the bank can only pay those specific checks.  Often accounting software can create those Positive Pay reports to send electronically to the bank.  It’s also generally good practice to have a separate checking account for payroll.
Lots of businesses issue invoices and receive payment later, so they have what’s called accounts receivable, ie. money owed to them.  What are the typical payment methods in your business and is one of them cash?  An internal system should include balancing deposits of money paid on account with payments actually posted to customer balances.  It’s helpful to have someone other than the person handling the money review which customers owe you money.  Whether it’s payment on account or payment for a product or service in the course of business, can someone accept cash, keep the cash, and mark the customer or sale as paid?
One particularly vulnerable type of businesses is one that receives payments from insurance companies, such as medical practices.  Typically, someone codes the charge and submits it to the insurance company.  That’s a job I wouldn’t want to have.  There have got to be hundreds of types of write offs and chances to use the wrong code.  It is not unusual for those submissions to be denied.  Maybe the computer just had indigestion and spit it back or the code was just wrong or whatever.  It is critical to have a responsible person follow up promptly on denied submissions.  Insurance companies have a grace period after which they will not accept resubmission and the money is just lost.  Perhaps there is just a perception by the medical practitioner that they have been working full out and the money is just not there to pay bills.  I had a wonderful client who had been told numerous times his billing person needed to be replaced.  He couldn’t bring himself to do that until he had to withdraw money from his pension plan to pay the bills.  Turns out, payment for surgeries worth thousands were lost because the grace period had past and she had not followed up on denied claims.  This was neglect, not theft, but the business still lost the money.
The list can go on and on.  Just to mention a few, credit cards, travel and expense vouchers, and I’m sure you can think of other examples that, without accountability, can be open opportunities for your hard earned money to leak out of your business.
Fraud Schemes and Embezzlement
I was in a client’s office just recently.  He had noticed a miscellaneous deposit for $.01 on his bank statement.  Sometimes companies with a valid reason to withdraw money from your bank will run a test transaction for a very small amount to verify the account.  At first the bank dismissed it as normal since it was identified as a payroll company, but he doesn’t have payroll.  Turns out, further investigation at the insistence of my client, the bank had identified a recent fraud scheme.  Instead of first trying to withdraw money from your account, they run a program that tests for valid account numbers and deposits a small amount, then return to drain the bank account.  Do you have overdraft protection or a sweep account?  A fraudulent withdrawal could reek havoc and drain more than one account!
Another fraud scheme is payments to a fake vendor.  An employee and perhaps accomplices create a fake or “shell” vendors that look reasonable for the type of business and write checks for goods or services.  Banks have stopped returning cancelled checks, but should send an image of the fronts of checks.  Have bank statements opened and scrutinized by someone knowledgeable of the business.
And then there is blatant embezzlement.  I was sharing war stories recently with the owner of a business resource management company talking about the importance of internal control systems for small businesses.  She had received a call for guidance about some odd spending and discrepancies found on credit card statements. The owner found hundreds of thousands charged on a business credit card for personal use but could not find the charges in the accounting records.  After engaging the management company to investigate the activities, they found the accounting manager was manipulating various transactions to force bank reconciliations.  This person changed vendor invoices and reduced or increased sales deposits/credits to reduce the credit card amounts on the books.  It was overlooked because the owner only looked at the profit and loss statement and balance sheet, while the CPA firm only requested the reports and bank reconciliations. This was only discovered from a call to verify a possible fraudulent charge to the credit card when the accounting manager was out that day. There was no oversight, segregation of duties or checks and balances in place to deter embezzlement or opportunity to take advantage.
Lastly, when all is said and done, if you suspect someone of stealing, make sure to consult an attorney for the required documentation and procedure for handling the dismissal to prevent a law suit against you or having to pay an unemployment claim.
Just one excerpt from article by Shelley Frost entitled How to Handle an Employee Who’s Stealing3

Escort the employee to his desk to gather his personal belongings if you decide to terminate him. Collect his ID badge, keys and other company items that would allow him access to the building. Escort him to the door.

Added by Ann – if he has any access to computers, immediately change passwords and disable remote access to the computer system as he walks out the door.  I’ve have actually done this, not because anyone was stealing, it was just a prudent procedure when an employee with computer access leaves a company.
If you’re a business owner, I hope this encourages you to examine your business and think about ways to protect yourself from theft.  If you’re an employee, I hope you will honor your employer by your honesty.  And most of all I hope we all are encouraged to always in every circumstance “do the right thing.” 
 
7 Sneaky Ways Employees Steal And How To Prevent It1 https://www.americanexpress.com/us/small-business/openforum/articles/7-sneaky-ways-employees-steal-and-how-to-prevent-it/
 
Why do you think employee theft is so prevalent in small businesses?2
http://www.foxbusiness.com/features/2014/03/04/understanding-why-employees-steal-and-how-to-stop-it.html
 
How to Handle an Employee Who’s Stealing3article by Shelley Frost
http://smallbusiness.chron.com/handle-employee-whos-stealing-11140.html
 
One other insightful article
Why do employees steal from their workplace? Matt Keating  Friday 7 October 2005
https://www.theguardian.com/money/2005/oct/08/careers.work1