Thermotron training --Embezzlement: Everything You Need to Know

Embezzlement: Everything You Need to Know


Who, What, Why and How? Detection & Prevention!
 

by Stephen A. Linker, CPA, DABFA


hil sybesma it's called "working the system"






Back by popular demand, this 3-part series on Embezzlement has been condensed in this month's issue.
So





 "what" exactly is embezzlement?  


 Get the in-side scoop from Daniel j Okeefe -- former thermotron prezzzz

he has an "Open--Door" policy


Here are some pertinent definitions.



First let us define Fraud. 



 Black’s Law Dictionary states that fraud is “a generic term, embracing all multifarious means, which human ingenuity can devise, and which are resorted to by one individual to get advantage over another by false suggestions or by suppression of truth, and includes all surprise, trickery, cunning, dissembling, and any unfair way by which another is cheated.”




Next, White Collar Crime – According to Black’s Law Dictionary:  Nonviolent, unlawful conduct committed by corporations and individuals including theft or fraud and other violations of trust committed in the course of the offender’s occupation.





Bear in mind that blue-collar workers can also commit so-called white-collar crime.  Blue-collar workers have access to non-cash assets, such as supplies, tools, inventory, and equipment.




Now Embezzlement is one type of fraud.  According to Black’s Law Dictionary:  The fraudulent appropriation of property by one lawfully entrusted with its possession.  To “embezzle” means willfully to take, or convert to one’s own use, another’s money or property, of which the wrongdoer acquired possession lawfully, by reason of some office or employment or position of trust.



thermotron ask you r boss what does thermotron "budget" for thief and embesslement??

remember if they deny it-- just smile and say-- sure--- we all know the "facts"



And finally,




 Defalcation – A defalcation is an embezzlement.  According to Black’s Law Dictionary:  A defalcation is an “act of embezzling;… misappropriation of trust funds or money held in any fiduciary capacity.  Commonly spoken of officers of corporations or public officials.”
The difference between embezzlement and larceny, popularly called theft, is that larceny is the taking of another’s property without the owner’s consent when the thief did not have lawful possession of the property or a position of trust.  So a street criminal who breaks into an office and steals the petty cash is committing larceny, whereas a petty cash clerk who steals the petty cash is committing embezzlement.



The Fraud Triangle




The research on fraud has identified three key factors that determine whether a person will commit fraud.  The three factors, which comprise the so-called “fraud triangle,” are: 1- perceived pressure facing the person, 2- perceived opportunity to commit fraud, and 3- the person’s rationalization, or integrity.




All three factors are usually necessary for fraud to result.  For example, an unethical person facing financial pressure will have to identify an opportunity to commit fraud to be able to commit it.  Similarly, a person facing financial pressure and in a job position that presents an opportunity to commit fraud will not do so if his personal integrity outweighs the other two factors.  On the other hand, even the second person might commit the fraud if he rationalizes it, for example, by convincing himself that he is only “borrowing” the money and will pay it back.
So understanding the three elements of the fraud triangle will provide the fraud investigator with more angles from which to investigate.  For example, an investigator might determine that several employees in a department had the opportunity to commit fraud there.  Investigation of the employees’ personal lives might reveal that only one of them also faced pressures that would motivate committing fraud.  However, while it is beneficial to consider pressures and opportunities, rationalizations normally are not a focus of the investigation because they are difficult to identify.






Here is some detail about the three factors.


Some of the West coast embezzlers started by being a neighbor hood house thief--

and they can point out the different houses they have robbed..


REMEMBER at Thermotron they "like it" if you telll them "that" you Lied for them"




Factor 1 – Perceived pressure facing the person
            a. Financial
            b. Personal habits
            c. Work-related feelings


Pressures that might motivate a person to commit fraud may be financial in nature, relate to a personal habit, or stem from work-related feelings.  Financial pressures include factors, such as debt arising from high medical bills, overuse of credit cards, divorce, investment losses, or sheer greed.  Personal habits such as alcohol, drug, or gambling addiction or an expensive extramarital affair, may result in financial pressures to commit fraud in order to obtain funds to support the habit or pay debts resulting from it.  Work-related factors include feelings of resentment because of being overworked, underpaid, or not promoted, that may prompt a person to “get even” with the employer by committing fraud against the employer.  Family or peer-group expectations also may motivate a person to commit fraud.
For example, Mrs. T, the bookkeeper, was getting a divorce and needed to amass legal fees for the divorce and the related child custody battle.  She also had a gambling habit.

Factor 2 – Perceived opportunity to commit fraud



a.       Level of trust is reached 


b.       Internal controls are weak or nonexistent


Opportunities to commit fraud can arise when an employee or manager reaches a level of trust in an organization or when internal controls are weak or nonexistent.  Then the employee or manager will perceive that there is an opportunity to commit fraud, conceal it, and attempt to avoid detection and punishment.  While opportunities to commit fraud in an organization may appear limitless, for any one person fraud opportunities are limited to the means available to him.  For example, a shipping dockworker would not have the opportunity to manipulate accounts receivable in order to steal cash receipts but might have the opportunity to steal inventory.
Good controls are an important means of limiting the opportunity for embezzlement, but even when controls exist, a person in a high enough level of trust or authority may be able to override the controls in order to commit the embezzlement.  For instance, a high level and trusted manager might be able to direct a lower level employee to forgo a control procedure usually performed.


Here are some examples of conditions that can provide an environment for embezzlement in an organization.



a.       Inadequate segregation of duties



b.       Failure to inform employees about company rules and about the
          consequences of violating them
c.       Rapid turnover of employees
d.       Constantly operating under crisis conditions
e.       Absence of mandatory vacations
f.        Failure to uniformly and consistently enforce standards and policies
          or to punish perpetrators
Here are some examples of conditions that can provide an opportunity for embezzlement by management.
a.       Existence of related party transactions
b.       Use of many banks
c.       Inadequate or inexperienced staffing in the accounting department
d.       Weak subordinate personnel
e.       Frequent change of auditors or legal counsel




For example, Mrs. T, was the company’s bookkeeper and office manager.  No one followed up on her activities.  There was no segregation of duties.  She performed all of the billing, collecting, disbursing, banking, and recording of all transactions.  She was always under a lot of pressure and like a good soldier, never took a vacation.  She explained to her boss that she “didn’t need a vacation because there was nowhere to go,” and she said she “loved her work.”




Factor 3 – The person’s rationalization or integrity



a.       Management honesty versus dishonesty
Personal integrity might very well be the most important factor in keeping a person from committing embezzlement.  There are many cases in which individuals with severe financial or personal pressures and the opportunity to misappropriate assets do not do so because of strong personal moral codes.  In a recent survey, auditors ranked “attitude” factors (such as management honesty) as more important than situational factors as indicators of the possibility of embezzlement.  Some investigators believe that a strong moral code can prevent individuals from using rationalizations to justify illicit behavior.  Some typical rationalizations for misappropriation of assets and management fraud include:




a.       I am only borrowing the money and will pay it back.
b.       Nobody will get hurt.
c.       The company treats me unfairly and owes me.
d.       It’s for a good purpose.
e.       It’s only temporary, until my financial position improves.
f.        Everybody’s doing it.
g.       I am not part of a team; I’m just an employee, a peon.



Characteristics of Embezzlers

Thomas bannash may provid some personal data





1 – Demographics are similar (sex, age, religion, and education level).
2 – Personalities are usually not antisocial.
3 – There is not necessarily a past criminal record.
4 – There is usually not a deficient family environment.
5 – There is not necessarily a sporadic job history.
Research into the characteristics of embezzlers shows that they share more demographic characteristics, such as gender, age, religion, and education level with the general population than with other criminals.  White-collar criminals do not usually have antisocial personalities, past criminal records, deficient family environments, or sporadic job histories.
Rather, they are usually older than other criminals, past thirty years of age, are married with stable family situations, and have above average educations.  Seventy percent of embezzlers are male.  The age and gender may be due to the fact that, as one study found, almost one half of all embezzlements are committed by professional and managerial employees.  Senior officers and owners commit ten percent of all embezzlements.  Until recently it was the older male who has attained that level of trust and authority that provides an opportunity for embezzling.  However, the study found that clerical and other employees commit thirty percent of embezzlements.  Moreover, as the percentage of females in positions of authority and responsibility over assets increases, it is believed by law enforcement authorities that the percentage of female embezzlers will increase proportionately.
Prevention!  Detection! 
Here is a list of some types of schemes that can be detected or, hopefully, prevented as follows:
Theft (not all theft is embezzlement), kickbacks, cash skimming , voids/under-rings, swapping checks for cash, alteration of cash receipts and cash disbursements documents, fictitious refunds and discounts, fictitious employees, kiting,  lapping, unauthorized bad debt write-offs,  fictitious accounts receivable, appropriating inventory for personal use, embezzlement of scrap proceeds, false charges to inventory, fictitious invoices,  excess purchasing of property and services, over-billing, duplicate payments, conflicts of interest, overtime abuses, and personal expense reimbursement schemes.

Sometimes combinations of schemes are utilized, for example lapping and unauthorized bad debt write-offs.  The combinations are virtually limitless. 



 Sometimes collusion is present.  


 If enough people are embezzling together, internal controls are inadequate as a preventive. 




Many investigations of embezzlement are based on suspicions about a certain type of misappropriation or about a specific employee.  In those cases the investigator can focus on the possible acts that the suspect could perform.




On the other hand, a general concern about embezzlement sometimes arises.  Examples of those situations include:


a. A business owner believes assets of the business are depleting with no apparent cause.b. Business partners question why they have incurred significant losses on their investment.c. A company wishes to assess the risk that embezzlement is occurring at a possible acquisition company.d. A bankruptcy trustee wishes to determine whether a bankrupt company’s losses may have resulted from   embezzlement.
In those cases, an investigator might perform some procedures to help determine if embezzlement is occurring or has occurred.  If it appears likely that misappropriation of assets is occurring, the investigator might be requested to investigate further.
So how do we detect that embezzlement is occurring or has occurred?  Theoretically, if there has been no specific allegation of embezzlement, one way to detect it would be to thoroughly investigate all aspects of the business.  Of course, this approach would be costly and impractical.  The process of detection is intended to help the investigator focus on areas where embezzlement is most likely to occur.
The specific steps in detection are a matter of judgment, based on factors such as which assets are likely to be susceptible, the type of business, and the facts known about the business and its current situation.  The process normally involves the following steps:



a.     Identify embezzlement exposures.b.     Look for symptoms of embezzlement in the exposure areas.c.     Consider pressures and motivations to commit embezzlement. 
        This step might be combined with one of the other two steps.
I


dentifying specific embezzlement exposures involves looking at factors that make certain assets more vulnerable than others.  Internal control weaknesses in certain aspects of the business will become evident as an investigation or analysis progresses.
As to symptoms of embezzlement, different symptoms apply to different types of embezzlement.  Examples of embezzlement symptoms include:




a.     Analytical symptoms, such as unusual changes in gross profit percentages.b.     Employee symptoms, such as unusual changes in an employee’s lifestyle or attitude.c.     Tips and complaints, such as comments from employees, customers, or vendors.
I want to note here that the presence of one or more symptoms does not necessarily mean that embezzlement has occurred or is occurring.  For example, analytical symptoms or changes in an employee’s lifestyle or attitude might arise for legitimate reasons other than misappropriation of assets.  In addition, an employee tip might be a mistake or a scheme to get a coworker in trouble.  The investigator should use judgment in evaluating symptoms and considering whether further investigation is warranted.
As to pressures and motivations, embezzlement often involves a pressure or motive to commit the misappropriation and a perceived opportunity to commit it and conceal it.  Identifying embezzlement pressures can help the investigator assess the likelihood that embezzlement is occurring and focus on individuals who might have pressures and motives to embezzle.



What is Internal Control? -




 Internal control is a process put into place by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in categories relating to operations, financial reporting, and compliance with applicable laws and regulations.
Reviewing Internal Controls - Probably the most important deterrent to embezzlement and other fraud is effective internal control.  Strong internal control can prevent or detect most types of misappropriation of assets or fraudulent financial reporting.  So a determination of whether embezzlement is occurring generally involves consideration of internal control.




Only some aspects of an entity’s internal control will be relevant in particular investigations.  The controls to be reviewed depend upon the organization, the particular embezzlement concerns, and other factors.  Controls relating to the safeguarding of assets are designed to provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of an organization’s assets.  These are primarily controls over operations but might also be financial reporting controls.




In most small companies, fraud and, in particular, embezzlement can be prevented to a great extent when owners are committed to the internal control process.  This includes monitoring the flow of paperwork, subtly noting the activities and attitudes of personnel, and reading and acting on financial reports.




Determining if misappropriation of assets is occurring or has occurred requires writing a program of procedures, which includes reviewing the relevant internal control procedures, identifying weaknesses, listing all of the possible symptoms, noticing which symptoms exist, investigating, and evaluating the information on a step by step basis.  The investigation program will change at a particular juncture when necessary, that is, when a lead is not producing results or when a new lead surfaces.