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Common Forms of Embezzlement

Fraud can crippling your business.  One o fthe largest forms of fraud is Embezzlement.  Embezzelment often is considered the worst form of fraud because the crime is being committed by a trusted employee.  Embezzelment is a real danger and often goes undetected for long periods of time before discovery.  Some embezzelment never gets detected.

 Common Forms of Embezzelment

  • Cash.  In businesses where large quantities of cash are exchanged, such as bars and restaurants, an employee can simply fail to ring up a sale and pocket the cash.  Using receipts that are sequentially numbered is one way to deter this form of embezzelment.
  • Lapping. In Lapping, a payment received from a customer is deposited in the embezzler's account. When a separate customer makes a payment, the embezzler records it as a payment by the first customer.  The cycle continues when a third customer pay. T his payment is used to cover the second customer and so on and so on.  One red flag for Lapping is that the employee overing this area takes little or no time off.   He  or she can't afford to have someone else handling the paperwork.
  • Fake refunds.  Fake refunds can take different forms. Here a refund is given to a customer but the money goes directly to the embezzler (the employee in charge of issuing refunds).  Another version of Fake refunds is when the Embezzler overpays an invoice or the payroll tax deposits and pockets the refunds when received.
  • Kiting.  Improved banking technology has made kiting less attractive for an embezzler but you should know it still exists.   Kiting takes advantage of the "float time" between when a company check is written and when it clears the bank account.  Here is how it works.  The embezzler writes a check to himself and deposits it in his account.  He can then write a check against his new balance back to the employer's account.

The smaller your accounting staff in your company is the more vulnerable you are to Embezzlement. The reason is simple -  a lack of separation of duties.  If one employee is responsible for enough different money handling functions, the temptation for Embezzlement is there.

What Can You Do?

The first answer is to separate some of the duties so that no one employee is tempted.   For example, you, the owner, may need to step into a couple of the cash-handling functions or outsource certain duties.  One clear deterent is to have you,  the owner, always receive the bank statements directly at your home.  This gives you a chance to open and review the bank statements.  Periodically, review a few customer transactions from billing to collection to the deposit into the bank.

The second answer is to have Dugan & Lopatka do an "internal control" review of your business every once in a while.   As your CPA firm, we understand accounting and will look at who does what on a daily basis and which duties need to be assigned to different employees to help prevent employee theft.

 For more information and to learn more on how you can better protect your business from Embezzlement, give Dugan & Lopatka a call at (630) 665-4440.




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