Is your business ripe for rip-off? Three bloodcurdling case histories ripped from the pages of the police blotter! Expert advice on steps you can take to guard against embezzlement.

These three schemes had been going on for years before the 'perps' were unmasked.

Embezzlement. What an ugly word. It couldn't happen at your business. Or could it? Read on.

Embezzlement Scheme No.1

The Case of the Identical Checks

A controller ordered a supply of consecutively numbered checks from the check printer. A few weeks later she called the printer and said that a temporary agency employee the company had hired to destroy old files had mistakenly destroyed the checks just received. The controller then ordered a new set of identically numbered checks.

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The controller now had in her possession two sets of identical checks. One set remained at the office and the other she took home. At the same time, the controller copied the business's check-processing software. This enabled her to run off on her home computer checks identical to the checks run at the office.

Every month the controller made out a business check, payable to herself, using her home computer, in the amount of $3,000. She noted the check number and cashed the check accordingly.

When she ran the legitimate business check at the office she was careful to run off the identically numbered check, also for $3,000, but this check was made payable to the U.S. Postal Service and charged to postage expense in the business's records. The Postal Service had never billed the business for this expense, and the check was never mailed.

When the controller received the business's bank statement, she simply destroyed the check made out to herself and replaced it with the identically numbered check made out to the U.S. Postal Service. If you would inspect the U.S. Postal Service check, there would be no indication that it was never cashed by the post office, as the check was endorsed with the actual post office's endorsement stamp by a friend who worked at the post office. The controller had even been careful to stamp the back of the check with a bank's cancellation stamp supplied to her by a friend who worked at a local bank.

The business's file copy of the bogus post office check was even backed up with an actual post office receipt supplied to her by the same friend who worked at the post office. This embezzlement had been going on for years before it was unmasked.

Embezzlement Scheme No.2

The Case of the Transposed Figure

A bookkeeper prepared the payroll checks every week. At the same time, he prepared the federal withholding tax check for Social Security, Medicare and federal income tax withheld from employees. The checks were routinely signed by the CEO and another staff member. The payroll checks were distributed to employees, and the tax check was sent to the Internal Revenue Service.

Every week the check sent to the IRS was approximately $300 too much, and the overpayment was always the result of transposition errors, which are difficult to detect. For example, if the actual tax liability due IRS was $1,140, the check was made payable in the amount of $1,410.

As is typical of a bookkeeper's responsibility, this individual prepared the quarterly and annual payroll tax returns, including W-2s. The real payroll tax records were kept at his home, and fraudulent records were kept at the office.

At the end of the year the extra $15,000 sent to the IRS was added to federal income taxes withheld on the bookkeeper's W-2. When he filed his personal tax return he received an annual $15,000 bonus courtesy of the U.S. Treasury and never signed a check.

This embezzlement had been going on for years.

Embezzlement Scheme No.3

The Case of the Ever-Growing $25 Check

A bookkeeper was going to retire in two years. Her husband had already retired and started a small retirement business called the Paper Clip Delivery Service. He would take a business office supply order, shop for the best prices and pick up the supplies for a $25 service fee. He had one client: his wife's business.

As checks were received by the business, they were deposited into the business's savings account to maximize interest revenues. When checks were disbursed, cash was transferred from the savings account to the checking account accordingly and in an amount sufficient to ensure that the business's checks would clear the bank.

On March 5 of her retirement year, the bookkeeper presented a bank transfer slip to the CEO transferring $35,000 from savings to checking to cover that week's checks. This was routine business. The CEO and another responsible employee signed the bank's transfer slip. Instead of transferring the money, however, the bookkeeper put the signed transfer slip into her purse.

The bookkeeper retired on Aug. 5, one week after completing the July financial statements, bank reconciliations and so forth. After her retirement party, she told the CEO that there was one unpaid $25 invoice due her husband and would he mind signing the check.

The $25 check was signed by the CEO and another employee. The bookkeeper went to the business's bank that afternoon to say goodbye to the tellers she had been dealing with for years. Prior to going to the bank, however, she took out the $35,000 bank transfer slip dated March 5 and easily converted the month from a three to an eight and transferred $35,000 into the checking account.

She then went to the bank where her husband's Paper Clip Delivery Service account was serviced. The $25 check payable to her husband's business was written with an erasable ink pen. She simply erased the $25 figure and changed it to $35,000 and deposited it into her husband's business account. The money was withdrawn the following week when the business's check cleared the bank system.

Because she had just received the bank statements and completed the bank reconciliations, she knew that the earliest anyone could possible discover the embezzlement would be in several weeks when the new bank statements would be received and the account reconciled. She had several weeks to cover her tracks. And she did.

Reprinted with permission. American Society of Association Executives 

Sad ... But True!

These three embezzlement schemes actually happened. What did they have in common?

* Each embezzler was an employee above suspicion.

* Each business was not audited by an independent certified public accounting (CPA) firm.

As these case histories attest, it is human nature to place people in positions of trust who have the appearance of loyalty and trustworthiness. Yet to safeguard itself, the business must reduce the opportunity for employee dishonesty.

Each of these embezzlements could have been avoided if the business had an effective internal control system.

Edward J. McMillan, also know as the "Fraud Guru," is a certified public accountant with McMillan & Associates in Lothian, Md. He presented a session on "Protecting Your Business from Employee Fraud and Theft" at the 2006 Small Business Conference.

RELATED ARTICLE

em bez zle (em-bez I, im-) tr.v. -zled, z-ling, -zles. To take (money or property) for one's own use in violation of a trust. [Middle English embesilen, from Norman French enbesiler: Old French en- Intensive) + besiller, to do away with, destroy.] em bez zle ment n. em bez zler. n.