Wednesday, April 11, 2018

Telltale Signs of Embezzlement

In retrospect, everyone should have known....

I have read a number of stories about lawyers (or company managers) who find out that, after years of loyal service, their secretary or accountant was embezzling from them - often to the tune of millions of dollars.   And usually the money is gone, too - to the casino or drugs or other money-drains.   So they can't get it back.

How does this happen, and how do they miss the warning signs?   Because there are many.

They usually find out about the stealing when good old loyal Suzie (and it is more often a woman than a man) goes on vacation at long last, or is hospitalized.  They hire a temporary replacement and after a few days, the replacement comes into the boss's office and says, "You need to take a look at this!"   The fraud unravels at that point.

What are the signs that these folks should have looked for?  There are many.   Suzie was a hard worker, alright - she never took a vacation in 20 years!   And the reason she never took vacation was that she knew if she left, someone else would look at the books and recoil in horror.   For this reason, many companies now require that people in fiduciary positions take their vacations.   No excuses!   If someone refuses to take vacation, year after year, that should be a warning sign.

Suzie also had excuses and reasons why financial reports were late or not available.   She would come to a partnership meeting, deflect demands for financial statements, and instead give an oral report of the firm's finances.   She would not disclose bank statements, balance sheets, or other financial documents.  And if pressed, she would promise to do so, and then waffle on that promise.

Again, most companies have learned - often the hard way - that this is a sign of embezzlement in progress.   Many partners overlook Suzie's tardiness or inability to provide financial statements, as they are all making so much money (they think) and let it slide.   A strict policy on this - having quarterly or even monthly financial statements for all the principals to review - is essential.   Also essential is an "open books" policy, so any of the partners can review financial records at any time.

If you have an accountant or secretary that balks at this, ask yourself why.  They will claim it is a disruption to their work flow, or some such nonsense.  Or that partnership financial information should be kept secret (from the partners?) or is privileged.   This is, of course, nonsense.

The Partners once proposed that Suzie hire an assistant.  After all, she was getting up there in age, and maybe she needed some help.   For example, in getting out those financial statements that never seem to materialize on time - if at all.  Suzie refuses.   She keeps all records under lock and key, and she has the only key.   Again, this should be a warning sign.  Whenever someone is an information hoarder, something is wrong.   At the very least, such people are an impediment to productivity.

How do they steal the money?   There are a number of ways.  If you don't have a mechanism for tracking your vendors (and vetting and approving them), it is a simple matter to commit invoice fraud.  The accountant simply pays an "invoice" for non-existent office supplies or some other supply or service.  They might also work in cahoots with an actual vendor, to have them over-inflate their invoices and then split the proceeds.   Or vendors may pay the accountant or other person who approves invoices for payment, in exchange for having business sent their way - business at a higher price, of course.

In cash businesses, it is very simple to simply pocket cash from purchases and not record the transaction.  That's why so many stores have cameras in them - not to take pictures of the customers, but to catch the action at the register.

Some embezzlers are just dumb enough to write checks to themselves - or to "cash".  They usually get caught pretty quickly, though.

What got me thinking about this was a friend was complaining that the volunteer organization they work for is having trouble getting financial statements from their volunteer accountant.  They get a lot of verbal reports, but no one is allowed to look at the books, and quarterly financial statements are delayed or demurred.   When the board has meetings, the accounting person can't attend "for personal reasons."

All of these things set off alarm bells in my head.   To me, not knowing the balance in my bank account is, well heresy.  And vague and contradictory financial information is, well, like having a ship without a rudder or compass.   You will end up on the rocks.