Guest Blogger: Joel Charkatz, CPA, CVA, CFE
We hear this phrase over and over. Why? Because it is almost inevitable that when we are called in to investigate an employee embezzlement case, the entire venture could have been caught very early. Once we begin to probe, and determine the fraud was easily discoverable, management sighs and says “If I had only looked.”
Statistics from the Association of Certified Fraud Examiners reflect small business is more vulnerable than large business when it comes to fraud. Why? Because big business “looks” more than small business. The median loss in small business (less than 100 employees) was reported to be $200,000, while the median loss in large business was just $97,000. Because they look.
Really large businesses many times have a Loss Prevention Department. This area’s responsibility is to catch and stop fraud and embezzlement in the company. While they may interface with the internal auditors, they are usually not accountants. Most likely the personnel in this department have investigative backgrounds – either in police work, insurance loss investigation, criminal work, etc. As a result, these folks have a mindset that is much different from an internal auditor, and very much different from the company’s outside CPA firm.
Depending on the size of a business, there are several very simple procedures that can be performed, usually only taking minutes per month. These procedures will uncover most employee embezzlement at or near the outset.
A good example is the fraud we investigated where the bookkeeper embezzled hundreds of thousands of dollars over a period of several years. She was able to cover up the theft by not paying payroll taxes the company owed for its employee withholdings. Of course, when a non-payment notice was received in the mail from the IRS, the mail clerk would give the IRS notice to Sally (not her real name) because it was “tax stuff and Sally gets all that mail.” The tax notice was hidden from everyone, and the fraud continued. This resulted in a significant loss to the company, and once discovered, were required to pay taxes, late payment penalties, and interest to the IRS. It almost put them out of business.
This type of employee action would have been discovered almost at the outset except for one mitigating factor. Sally had been with the company for many years and was a trusted employee. Consequently, there were very few controls in place on her position. Were the owner to, once a month, simply receive the bank statements unopened, and peruse the canceled checks, he would have seen the checks payable to his bookkeeper, and discovered the embezzlement in the very early stages. If only he had looked.
One final word….trust is not a control. Just because an employee is trusted does not mean common sense (read internal controls) can be suspended.
Joel Charkatz, a Shareholder with KatzAbosch, has served the Maryland business community for more than 40 years. He is Chairperson of the firm’s Business Valuations & Litigation Support Group and a member of the Medical Practice Services Group. He is also the past Chairperson of the Maryland Association of Certified Public Accountant’s Business Valuation, Litigation, Fraud and Forensics Group. Mr. Charkatz provides a full range of accounting and tax services for clients including business valuation, forensic accounting, litigation support/expert witness, real estate development, management advisory services to closely-held businesses and tax planning.