Michael Goldman & Associates, L.L.C. - Consulting
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Goldman's Critical Support - Fall 2001 Are your employees stealing?There are three basic ways an employee can steal: cash theft, theft of non-cash assets, and fraudulent disbursements. For each of those three ways, there are methods of detecting the theft. Cash theft Theft of cash can be further broken down into two categories: skimming and larceny. The difference is in the timing – larceny is the theft of cash that the company has already accounted for, and skimming is the taking of money before the company has the opportunity to account for it. Obviously, skimming will be more difficult to detect because there is no direct audit trail. Skimming can occur through unrecorded sales (cashiers or bartenders put cash in their pockets and not properly ring them in the cash register), understated sales (have the customer pay full price, then enter a discounted sale in the accounting records), and theft of funds from incoming mail or receipts. Cash businesses are more prone to skimming than businesses paid by check, credit card, or electronic transfers. Checks that are being systematically stolen are often deposited in false company accounts that have a similar name but belong to the thief, not the company. Skimming will always cause overstatement of other assets, either accounts receivable or inventory. If the skimmer has access to accounting records and can adjust the overstated accounts, the adjustment will usually manifest itself in a rise of cost of goods sold and lower than expected margins. Skimming can be inferred in a forensic review and then verified by baiting the suspects with marked transactions and determining if the transactions flow into the accounting system. Cash larceny will be detectable if the accounting records are properly maintained and analyzed. The larceny occurs at the points in the business where there is cash, usually at the cash registers, the mail room, or deposits in transit. Cash larceny should become apparent during cash register or bank account reconciliation procedures, and then the question becomes, “Who did it and where are they now”? When the existence of larceny has been confirmed, contact law enforcement officials and/or legal council, and bring them into the investigation. Non-cash assets There are two ways to misappropriate a non-cash asset – steal it or misuse it. Company cars, telephones, computers, office equipment, and supplies are often the items most misused. Often these will occur in conjunction with theft of time (doing personal shopping on the Internet or running a business on the side during work hours). Misuse of company assets is usually immaterial, and some businesses even consider it a perk of employment. Material misappropriation can often be detected by reviewing long-distance phone bills, copy machine meters, supply usage, Internet access, etc. Theft of assets, on the other hand, can be substantial. Theft can occur in broad daylight when other employees are reluctant to report it. Poor morale, poor communication, intimidation, loyalty to friends, or acceptance of what appears normal will all contribute to this reluctance. Often the thief is someone you thought was one of your most trusted employees. Like theft of cash, theft of inventory will manifest as overstated accounts receivable if the thief manipulates sales documents, or inventory shrinkage and lower gross margins if the inventory is just taken. Fraudulent disbursements Fraudulent disbursements generally look just like legitimate company activity, and can include forged checks, false invoices or expense reports, false timecards, ghost employees or vendors, fraudulent or overstated refunds or credit memos, false voids, overstated commissions, unauthorized use of company credit cards or telephones, kickback schemes, etc. The thief in this case uses a legitimate company function for an illegitimate purpose. Forgeries usually involve changing a name on the disbursement, the amount of the disbursement, the destination of the disbursement, or the authorizing signature. More elaborate schemes include the forgery of documentation that supports the disbursement. Fraudulent disbursements are usually detected through analytical review of the accounting records. If the scheme is large enough, there will be cash flow or profitability problems, changes in company trends, vendor complaints, or other indications that something is amiss. A detailed comparison of what happened compared to what was expected to happen, and/or a detailed review of source documents, will assist in the detection of this type of theft. Accounting symptoms include inventory shrinkage and inflated expenses. A good forensic review can usually find most types of theft. Prevention of theft, however, is always better than detection. The only way to prevent employee theft is with good internal control. As companies move to cut costs in a recessionary environment, internal control is often one of the first casualties. A future issue of this newsletter will discuss the implementation and usage of cost effective internal controls. © Michael Goldman 2001 For more information, please go to www.michaelgoldman.com Editorial material in these newsletters is intended to be informative, and should not be construed as advice. For advice on any specific matter, please consult your financial or legal adviser.
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