Larceny Embezzlement Theft

COLLECTOR’S INK October/November 2009 • Volume LIV, No. 8

by Jerry Muto, CAC’s CPA

y assignment in this article is to discuss the “E” ing” until they can eventually pay back the amounts taken word – Embezzlement. So why, in the title, did I through their shrewd financial maneuvering. put the words larceny and theft? Larceny and theft M People and families all over the world have been affected are both defined as thievery and an embezzler is a thief; by the recent world economic melt-down, and in some cas- these definitions are linked in a Thesaurus to one another es, do not see any solution to their own economic problems (reference embezzle, larceny, theft). outside of embezzlement. People are being pushed to their I wrote a “teaser” article in the September 2002 Collector’s financial and economic limits with, in their mind, no hope Ink labeled “Hot Topic: Embezzlement” which was designed for financial recovery. A good example is where one or to stimulate interest in a workshop presented at the 2002 both working members of a family lose their jobs because CAC Annual Convention & Expo. The text in that “teaser” of company layoffs or the company going out of business. article is still applicable today and maybe even more so. They have no economic or financial safety valve to rely on To save you from trying to retrieve your archive copy of the because they may have been living from paycheck-to-pay- Collector’s Ink issue referenced, or calling the CAC office check. With savings gone, credit cards maxed out, pos- to have them send you a copy, I will repeat a lot of that sibly facing foreclosure on their home, maybe an illness in article and expand on the points made. the family, etc, etc, and little or no hope of replacing their pre-termination income, they turn to embezzlement as a Two dictionary definitions of embezzlement are as follows: means of replacing lost cash flow. People do things they Embezzle – to steal (money, etc entrusted to one) never thought themselves capable of doing when the chips are really down, and they perceive limited or no choices. Embezzlement – the fraudulent appropriation to one’s We generally think of embezzlers as slick, white collar crim- own use of property lawfully in his possession. Embezzle- inals – not always the case. It can be anyone of any age or ment is often associated with bank employees, public of- gender. You cannot profile an embezzler. ficials or officers of organizations, who may in the course of their lawful activities, come into possession of property, From the 2002 Collector’s Ink article, I noted that, “People such as money, actually owned by others. who are otherwise trustworthy and beyond reproach can be led into the criminal life of an embezzler for any number There have always been embezzlers, beginning when peo- of reasons – a major illness in the family requiring substan- ple were entrusted with the money or possessions of others. tial financial resources beyond the capability to pay with There are different motivating factors that cause a person available resources, a desired lifestyle beyond the means to embezzle. available, a ‘Robin Hood’ mentality, a mental challenge to There are those who get a certain excitement from the em- see if the deed can be pulled-off…,” or perhaps a sense of bezzlement process and whether or not they will get caught; drama and excitement of getting away with something, the there are those who embezzle one time, find it relatively list goes on and on. easy to do so, and then begin a habit of embezzlement; Two of the key elements to preventing embezzlement are and, there are those who, like a chronic gambler, find it timely, accurate recordkeeping and frequent, continuous as a means to great riches because they are only “borrow- monitoring of business financial activities. Internal accounting Webster’s New World Dictionary controls and segregation of duties are keys to prevention. Barron’s Legal Guides Law Dictionary ©2009 California Association of Collectors, Inc. All rights reserved. Materials may not be reproduced without written permission. COLLECTOR’S INK October/November 2009 • Volume LIV, No. 8

The first element—timely, accurate recordkeeping—is re- discrepancies because cash flow did not match production quired to identify if or when a problem, anomaly or dis- and sales. This is a case where an ounce of prevention crepancy occurs. For example, if the bank accounts are would have been worth a pound of cure. Prevention was not reconciled on a timely basis by someone with no cash not high on the radar scope of the owners at the time, but receipts (include checks and credit card payments as cash) it is now. Diversion of cash received was easily made by or cash disbursement responsibilities, the possibility exists pocketing cash and not invoicing customers for the services that manipulation of the bank accounts or inadvertent er- provided. If a customer paid by check, an invoice was often rors could go undetected for a long period of time. Yes, it not generated through the accounting system, the check is a pain-in-the-neck to assign someone independent of was deposited and cash for the check amount was taken the receipts or disbursement function to reconcile the bank from the cash register during the day. Result, the cash reg- accounts, but it provides a safety valve by having some- ister balanced and no invoice appeared to be unpaid. Early one independent of cash functions to verify transactions detection may have been achieved by comparison of daily through the bank reconciliation process. If a discrepancy is production to amounts invoiced. detected, it can be addressed quickly before too much time Daily production reports can be revealing and substanti- passes and, if there is a problem, remedial action taken. ate amounts invoiced. Periodic comparison and analysis of Another reason for timely bank reconciliations is to detect production versus invoiced amounts versus collections on bank generated charges or credits which could explain or account, or cash/check receipts are useful tools to moni- bring to light checkbook versus bank account differences. tor your business, detect problems, and identify potential For example, if a check is written for $400 and is recorded problem areas. Not all unfavorable reports (expected re- in the check register for that amount but the bank clears sults versus actual results) are indicative of embezzlement, (pays) the check for $4,000, investigation is required. Is but they do represent something that should be investigated it an honest error, a bank error, or is it an indication of to a satisfactory conclusion. embezzlement? I have addressed some elements related to the income side The second element – continuous monitoring of financial of the business. What about the disbursement side? Em- activities—is a requirement that a responsible owner/part- bezzlement can occur through the disbursement side of the ner/manager or other knowledgeable person look at and house too. Amounts on vendor checks may be changed, review the completed bank reconciliations, sign or initial payee name on check changed after signing by authorized the reconciliation to signify review and approval, and to check signer, etc. Account-to-account phone or electronic look carefully at the check register to get a sense of the na- funds transfers made by authorized individuals must be ture of the expenditures. For example, payments to family monitored to ensure the integrity of the disbursement(s), members, payees unusual for your business such as doc- and that the transfers are valid amounts for valid reasons. tors, jewelry stores, individual names that are not recog- Transfers to or from accounts in the business must be docu- nized, frequent payments to non-vendors, bank transfers mented to provide an audit trail and to document each between or among accounts, and large transactions should transaction. be investigated. See if any patterns exist that are out of the ordinary. Sometimes banks make a “bank originated entry” which appears on the monthly bank statement. These types of One of my clients was the object of an embezzlement entries may occur when a vendor immediately draws on scheme a few years ago. The potential for embezzlement your bank account when a check is presented. The check arose many years before the actual embezzlement oc- itself is your only evidence of to whom the disbursement curred. The client was unwilling to make changes in their was made. The same thing applies to cashier’s checks accounting personnel structure to segregate duties of vari- – banks report them as a “cash withdrawal” but do not en- ous employees and placed nearly 100% reliance on one ter a payee for reporting on the bank statement. Unless you trusted bookkeeper. The business was generating so much keep adequate documentation for a cashier’s check such positive cash flow there was no incentive on the part of the as a copy of the cashier’s check (you get one from the bank owners to take precautionary measures. The result was that when it is prepared) and the invoice that is being paid, the it was difficult, even after detection of the embezzlement, transaction may be “lost” in the accounting records. to quantify the magnitude of the embezzlement because of poor records. The client was able to detect that there were

Staff personnel with banking access and duties to write disbursement records. Checks for large amounts should be checks must be monitored. An employee’s extreme over- physically inspected to verify the check amount, the check confidence, an aura that they can do almost anything fi- payee, and that the endorsement on the check matches the nancial, and near-belligerent attitude that their integrity or check payee. In today’s electronic age, many banks do not honesty would dare be questioned by anyone, is sometimes return cancelled checks but they may be viewed on-line. the indication of someone to be monitored closely with re- Once a disbursement check has been written and signed, it spect to company financial transactions. The bravado, ar- should not be returned to the signer(s) for mailing. A person rogance and hide-the-ball attitude of such an employee with no cash duties (receipts or disbursements) should mail should set off flashing red lights in the brain of the observer. the check. Sometimes, even bank employees get caught up in the eu- phoria of an embezzler’s scheme. Petty cash funds should be established at a reasonable level for the business, and reimbursement should be carefully I have an example of such a condition that resulted in a monitored as to the nature of the expenditures from petty company losing many hundreds of thousands of dollars cash and the size of the disbursements. It is possible to and resulted in jail time for the embezzler. The situation abuse the petty cash fund reimbursement process and use was that the embezzler was a high-ranking bookkeeper it as a slush fund. The key is to name a specific person as for the company that routinely paid vendors with checks the custodian of the petty cash and hold them responsible or wire transfers exceeding a quarter million dollars at a for the fund. As you might guess, the petty cash custodian time. The embezzler started their thievery over a period of should have no other cash duties. time. First it began with small amounts, and then graduated to the big leagues of taking many hundreds of thousands Embezzlement is generally not a single isolated theft; it is of dollars from the company. The scheme was developed a series of events (thefts). An embezzler is best illustrated in stages. Originally, the embezzler did not have signature by the popular Johnny Cash song, One Piece at a Time. authority on the company bank accounts and, after gain- In the song, an employee at an automobile manufacturing ing the confidence of the check signers and owners, was plant decides to take automobile parts home and, over the added as a signer on the company checking account. For course of his employment, take enough parts to build his the larger checks (some in excess of $250,000) the payee own automobile. The chorus says it all “…I’d get it one was changed after one of two required signers had signed piece at a time and it wouldn’t cost me a dime….” the check, the embezzler was the second signature, and Embezzlement, although often thought of as a theft of cash, changed the payee on the check. Bank personnel, when can also be goods or tangible things. For example, charg- the check was presented for payment to the embezzler’s ac- ing the company’s credit card for goods delivered to one’s count, had been pre-conditioned to think of the embezzler home can be an example of embezzlement. as the beneficiary of a multi-million dollar family trust fund. The embezzler led an extravagant lifestyle with luxury cars, A great deal can be written about embezzlement and the expensive vacations, and all the trappings of a wealthy in- process. This article scratches the surface of the embezzle- dividual. Transfers of money among accounts was confus- ment world and provides some food for thought. Each busi- ing, to say the least, based upon sheer volume of transac- ness might consider an evaluation of its internal account- tions. Finally, company officials could not understand why ing controls and make recommended changes to protect the company was posting favorable profits but did not have against embezzlement. Monitoring systems or procedures the cash flow that was expected. A forensic audit revealed should be set up to mitigate or eliminate the opportunity for the fraud and the house of cards created by the embezzler embezzlement. Implemented systems and procedures keep fell apart. honest people honest and may deter the dishonest from criminal activity. •• Participation by owners or management is required to take away the incentive or opportunity to embezzle. Incoming receipts may be sent directly to a bank lock-box. Bank statements may be sent directly to the home address of an owner or high-level manager with no cash duties; the un- opened bank statement should be reviewed for large or unusual items and compared with the company receipts and