Newland's Business Notes

Embezzlement – Again?

 Volume 7 Issue 2 -- March/April 2003

The question mark in the title reflects the continuing “popularity” of embezzlement among businesses.   While not confined to smaller businesses, embezzlement happens more frequently in smaller organizations where one staff member has access to, or control over, many business activities like writing checks, making deposits, balancing the monthly bank statement, and writing payroll checks. 

An example would be Gonna Getit, who worked at Loose Goose Plumbing for 25 years and eventually became office manager.  During the three-year period she was in control, her boss, Asa  Asleep, let Gonna completely control the flow of cash and funds, the bank statements and the filing of tax returns.

As embezzlers are prone to do, Gonna decided to start paying herself amounts greatly in excess of her authorized salary.  She also paid amounts to her husband who did not even work at the company, documenting the checks as subcontractor expenses.  Gonna also drew checks for large amounts for nonexistent office expenditures, and deposited checks payable to Loose Goose into her own account.  Perhaps the worst injury was filing the tax returns without paying the tax due, while hiding that fact from Asleep.

The fact patterns are many and varied, but the basic weakness that permits the embezzler to begin taking funds from the business is the inability or failure of the business owners or principals to check cash disbursements and payments. 

What’s a Business Owner To Do?

There are many ways that embezzlement can be stymied but there is a need for eternal vigilance.  For starters, the business owner should make sure that the employee who writes the checks or deposits checks received does NOT balance the bank statements.  Allowing one person to have complete control over the bank account provides an opportunity for an embezzler to continue embezzling for extended periods of time.

Another way to help prevent embezzlement is for the business owner to open bank statements and look at the checks that have been issued.  By doing so the owner can see if the payees are bona fide and make sure that the signatures are not forgeries.  To prevent the theft of large amounts, an arrangement can be established with the business’s bank to require two signatures for checks in excess of a certain amount.

Likewise, it is prudent not to let employees write checks for cash without explicit approval of the principals.  Allowing employees to write checks for cash affords an embezzler like Gonna Getit ample opportunities to take cash from the business.

Don’t assume all embezzlements are as brazen as Gonna’s writing unauthorized checks to her husband and herself.  Would-be embezzlers will sometimes go to elaborate lengths to create phony businesses and accounts and have third parties involved.  A friend may be on the take as well and kicking money back to the embezzling employee. 

In businesses where customers pay in cash, the ability of employees to dip into the cash drawer is a constant risk.  One client, who operated a skating rink, thought there was good control over cash. The employees found a new method of stealing cash the client did not anticipate. 

The skating rink had a concession stand that sold pizza that was supposed to be sliced into six slices.  The client knew the number of pizza pies it purchased and figured that the cash from pizza sales could be approximated.  The client eventually discovered that some employees were slicing the pizza into eight slices instead of six, then selling the two extra slices from each pizza and pocketing the money. 

We hope the suggestions contained in this newsletter will assist you in avoiding embezzlement at your business.

Embezzlement and employee theft have a chameleon-like ability to hide and transform so it is unlikely that such activities will ever cease.  They are brazen and sometimes subtle.  You should discuss additional ways to avoid embezzlement with your accountant if you suspect your business is being victimized. 

Copyright 2003

Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Newland's Business Notes is expressly prohibited without the written permission of Newland & Associates, PLC.

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