Embezzlement Points Up—The Need for Stronger Safeguards

Reports of a $118,000 embezzlement at Toppan Printing, headquartered in Somerset, N.J., stunned members of the graphic arts community when it became public this past spring.

Of course, all businesses are vulnerable to internal theft. Nevertheless, having the crime occur in one’s own industry makes it more relevant, more threatening and brings up questions about the measures companies must take to protect themselves.

Security experts emphasize that no one should ever relax his or her vigilance in seeking to avert, or at least minimize, exposure to embezzlement.

In a piece appearing on the AllBusiness Web site, www.allbusiness.com, John C. Shovic, a partner in Coeur d’Alene, Idaho-based MiloCreek Consulting, emphasizes four areas to which business owners should pay special attention:

Accounting books/reconciliation: In order to track where money is coming from and where it is going, books must be current, and the manager needs to look at the income statement, balance sheet, accounts payable, and accounts receivable on a monthly, if not weekly, basis. Books must be audited by an outside firm at least once a year. Bank accounts need to be reconciled with the books and with themselves on a monthly basis, and if at all possible, that reconciliation should not be performed by the bookkeeper.

In addition, the bookkeeper should take a full, uninterrupted annual vacation of at least two weeks if possible. This permits transactions to clear properly in his or her absence.

Check signing and disbursement: The bookkeeper should not sign checks. The highest ranking manager or owner should sign every check that goes out of the company. Each check should be looked at, and if you do not know what it is for, ask questions. All checks should require two signatures.

Inventory: Periodic reconciling of orders to inventory is a good way to prevent placement of orders to fictitious companies for materials that are never delivered but are paid for. Even better, perform partial inventory checks on a random basis to keep a potential embezzler worried about when his or her scheme could be uncovered.

Cash: If you accept cash payments, establish a dual control system, in which more than one person is responsible for signing off on cash received.

Mike Osborne, director-global security for Toronto-based Kinross Gold Corp., urges an anti-fraud program containing both proactive and reactive components. On the proactive side, he lists employee awareness training and regular testing of systems, including comparison of employee addresses versus vendor addresses, bank account comparisons, and merchant codes on company credit cards. If a fraud is discovered, he insists, it is extremely important to investigate promptly and thoroughly.

If there is no internal audit department, he says, “Choose a competent and reliable firm to conduct the investigation. Not doing so will result in more heartache for the company, especially if unethical tactics are used during the course of the investigation. Look for investigators with credentials such as certified fraud examiners, former financial fraud experience, and a good reputation in the industry. Prior to engaging the firm, ask for an investigative plan so you can see the logic and progression of the investigation.”

No question, expertise and experience have their place in any plan of defense, but some aspects come under the heading of just plain common sense.

For example, Larry Richman, chairman and CEO of San Diego-based Heritage Security Services, a contract security guard services company, says, “My best advice would be to screen employees carefully for their credit background and attitudes toward drugs, alcohol and dishonesty. Generally speaking, people with high-risk attitudes and/or irresponsible paying habits tend to bring those behaviors to work with them, particularly addictions like drugs and gambling. They gravitate to like-minded co-workers and often create a culture of progressive permissiveness toward rule violations that contributes to crimes on the job.”