Your money is missing!!

The sun is shining and the temperature is balmy. Things have never been better between you and your spouse and all of your children received notices yesterday that they were once again on the honor roll. College scholarships are pending. You whistle a happy melody as you drive to work.

Your doctor just told you that you are twice as healthy as you have any reason to expect and you're carrying a scratch ticket in your wallet that is a $2500 winner. A smile erupts on your face as you enjoy the moment.

Life is good. Why just last week, out of the blue, your employees chipped in and bought you a new set of golf clubs for your birthday "for everything you've done to make this a great place to work." And there is a growing stack of complimentary letters from customers on your desk.

To top it off your job is actually getting easier! With so many long-term employees who could be trusted with almost anything, the business practically runs itself.

Profit is up. Gross revenues are up. customer satisfaction is the highest in memory. Then as you settle back in your chair with your morning cup of coffee, your assistant pokes his head in the door and says, "Boss, can I see you a minute?"

"Sure," you reply, while absently reviewing your To Do List for the day. "What's up?"

"I think we've got a problem..."

Indeed you do.

According to Ed McMillan, a Certified Public Accountant and noted industry speaker, the incidence of employee fraud and embezzlement has increased dramatically in the past few years. And no one is immune.

McMillan, who presented a session on fraud and embezzlement at the 2001 FEMA (Farm Equipment Manufacturers Association) Spring Conference says, "Establishing an effective set of internal controls is the first line of defense from fraud and embezzlement. Continued vigilance is the next.

"In today's litigious society, business people are increasingly hesitant to provide honest evaluations of former employees when queried by prospective employers. It is an unfortunate fact that it is increasingly difficult to receive an honest reference from prior employers. You really don't always know whom it is that you're hiring. Or how they've performed in the past."

Complicating the task for business owners and managers is the fact that, according to McMillan, "in almost every situation where fraud has been discovered, the guilty party is the person above suspicion."

And you really can't feel comfortable simply because you employ the services of a CPA. Nor does a periodic CPA audit offer much protection. According to McMillan, such audits detect only about 2 percent of the fraud cases discovered.

McMillan's research indicates that even internal audits only account for 18 percent of detections.

Your employees themselves are one of the best sources of detection. Whistle blowers uncover approximately 30 percent of all cases of embezzlement.

But perhaps the most stunning statistic of all is that, according to McMillan 50 percent of all cases of fraud and/or embezzlement are discovered by sheer accident!

How can embezzlement go undetected?

First you must remember that McMillan indicated that in almost every case, the crime was committed by the person above suspicion. And people rarely see what they don't look at.

Fake invoices can be generated easily by someone with the right knowledge and access. Checks can be issued for nonexistent obligations and funds can be transferred to another bank account with the right signatures and passwords. All that is required is that those in a supervisory role don't look too deeply into the details of the financial records. This provides the opportunity. Personal financial difficulties generally provide the motive.

The perpetrator in these cases is most usually someone who handles money and books. That provides the ability to hide reality behind a set of "cooked" financial records. Additionally, the guilty party is usually one who is seen as firmly committed to the success of the business. He or she usually works long hours and rarely takes a day off, always coming in on those days to "make sure that things get done right."

In reality, this dedicated employee has carved out a personal fiefdom, free from oversight or control. He can't afford the possibility that in his absence, someone else will open the wrong file or print the wrong report... the one that will expose the falsification of records.

Businesses that handle "big ticket" products and services should be especially vigilant. It is not the pencils and notepads going out the back door that offers the greatest potential for business disaster, it is the falsified checks and dummy bills coming and going through the front door that offer the bigger threat. And the larger the sums involved, the easier it is to skim off the top.

McMillan recommends that every business set up a system of internal financial control. Irrespective of business size, there are a number of relatively simple steps that can be taken to help insure against employee dishonestly.

If You Find Yourself the Victim

Investigate first! Never accuse until you know the facts.

* Call your attorney and CPA for advice immediately.

* Contact the insurance company that handles your fidelity bond.

* Be careful when confronting the person:

* If there is any possibility of a problem, be sure everyone is protected.

* Consider having your attorney and CPA with you, but always have a witness, particularly if the situation is male-female.

* It is usually better to confront the person after business hours when fewer employees are present to avoid an incident and embarrassment.

* On advice of counsel, the individual should either be terminated or put on administrative leave.

* Change computer passwords immediately.

* Make sure you get such items as keys, credit cards and so forth, and consider changing the door locks.

* Get advice from counsel on how to relate the circumstances to staff and so forth, and how to handle references.

* And when it's all over, work with your CPA to thoroughly evaluate your system of internal controls and correct whatever deficiencies that led to the problem.

The checklist at left, relative to internal controls' is one that can help you assess your business' risk factor. For every question you answer with a "no," you may wish to review your procedures with an eye to improvement.

RELATED ARTICLE: The Vigilant Two Dozen -- A Checklist for Internal Controls

YES NO

-- -- Are the bank statements forwarded directly to the Chief Executive Office, and are they reviewed before accounting receives the statements?

-- -- Are two signatures required on every check?

-- -- Are accounting personnel prohibited from being signers on bank accounts?

-- -- Are checks received in the mail endorsed by whoever opens the mail before other employees come into contact with checks and is a log of checks received maintained?

-- -- After the checks have been endorsed, do you prohibit employees other than accounting from coming into contact with original checks?

-- -- Is the check amount on manual checks protected with a check protector machine?

-- -- Does your CPA firm evaluate your system of internal controls and do you take their suggestions for improvement seriously?

-- -- Are all employees who handle checks and cash bonded?

-- -- Do you require employees to take vacation?

-- -- Is the check supply kept under lock and key?

-- -- Do you use a high quality check stock that would be difficult to scan?

-- -- Does your endorsement stamp spell out the full legal name of your organization and does it also include your bank's name and your account number?

-- -- Are two people involved in computing payroll and remitting payroll taxes?

-- -- Do you have written internal control policies?

-- -- Do you periodically review the adequacy of your fidelity bond?

-- -- Does your CPA firm do unannounced checks on bank statement reconciliations?

-- -- Do you ever check the bank's records as to authorized signers on signature cards?

-- -- If you have cash transactions, are the policies tested?

-- -- Do you have an effective computer back-up system?

-- -- Are credit card and loan applications shredded?

-- -- Do you have an effective audit committee?

-- -- When key employees terminate, do you have an exit audit?

-- -- Do you have an insurance committee?

-- -- Are your controls on credit cards adequate?

Edward J. McMillan is a Certified Public Accountant and Certified Association Executive. He is the first recipient of the United States Chamber of Commerce's Excellence in Teaching Award (1997) and was appointed Faculty Chair of Finance, for the United States Chamber of Commerce's Institutes for Organization Management in 1992, a position he still holds. His list of other awards and appointments is too lengthy to list here and he is a frequent keynote speaker and lecturer for national and regional associations and chambers of commerce. He can be reached at 301-627-2733, [e-mail] or by visiting his website, http://www.nonprofitguru.com.