Posts made in April 2018

Could your employees be stealing from you? Fraud is more common than you may think

The Denver Post | BUSINESS

Employees attempt to steal from their employers in many ways. The most prevalent schemes center on asset misappropriation

by Gary Miller | GEM Strategy Management| gmiller@gemstrategymanagement.com

A business owner I know was seeing a slight decline in his gross revenues and gross margins last year at three of his five retail locations. He couldn’t understand what was going on. So he installed an enterprise resource planning system including a point-of-sale inventory management system. He hoped that these new systems would isolate the problem and improve his company’s profitability.

But things didn’t change. Product margins were less than expected; product sales were flat; cost of goods sold were inconsistent; and, the inventory analysis never reconciled with the company financial books and records. Something was radically wrong. The business owner contacted a management consulting firm for help. After an extensive review, the firm found that the company was a victim of fraud. Someone or several employees were embezzling money through misappropriation of assets.

That business owner isn’t alone. According to the Association of Certified Fraud Examiners, nearly 40 percent of fraud occurs at privately held companies and 30 percent occurs at companies with fewer than 100 employees. The association estimates that fraud causes average revenue losses of 5 percent annually.

Employees attempt to steal from their employers in many ways. The most prevalent schemes center on asset misappropriation. It accounts for almost 80 percent of employee fraud schemes. Below are the top asset misappropriation employee schemes:

  • Authorized check maker. An employee authorized to sign checks for the company makes a company check payable to himself/ herself. The employee then changes the payee’s name in the company’s accounting records so it seems as if the check was written to an authorized vendor.
  • Altered check or forgery. An employee intercepts a signed company check and alters the original payee name or the check amount using items such as correction fluid, “check washing” solution or a pen eraser. The scheme is perpetrated by an employee who receives bank statements and performs bank reconciliations.
  • Billing manipulation. An employee submits fictitious invoices from a “shell company”, set up by the employee, and then issues payment to the shell company.
  • Non-cash misappropriations. Rather than stealing cash, an employee steals inventory or other physical assets. A physical inventory count would reveal lower inventory levels than those reflected in the company’s perpetual inventory records, a concept often referred to as “shrinkage.”
  • Payroll and expense reimbursements. Employees submit false documents or manipulate the payroll system to create unauthorized payroll disbursements or expense reimbursements, alter data used to calculate performance-based incentives, generate paychecks to non-existent employees, or steal checks payable to terminated employees.
  • Cash register disbursements. Fraud often occurs at the point of sale when an employee processes a false product return or voids a sale that was previously recorded and steals cash paid in the transaction. Alternatively, a salesperson may purposely skip entering a sale into the company’s point-of-sale system when a cash payment is made and pocket the proceeds.
  • Lapping schemes. An employee applies a payment amount on a customer’s invoice that is different than the invoice listed on a customer’s remittance advice. This occurs when the employee is using a lapping scheme to conceal the skimming scheme. For example, if the customer intended to pay invoice #003 per the remittance advice, but the employee instead applied the customer payment to invoice #002, it is likely that the employee previously skimmed the payment for invoice #002 and must now conceal the misappropriation.
  • Unusual number of customer charge-offs or credit memos. An employee identifies an amount as uncollectible when the customer’s payment was actually received and misappropriated by the employee; or, conceals a company’s refund of a customer’s deposit that were initially misappropriated.

Business owners should recognize the signs that might identify fraud:

  • Understand how various asset misappropriation schemes work, and which schemes pose the greatest threat to your company’s operations;
  • Maintain stringent oversight of all accounting operations, and hire a third party to audit your financial operations periodically;
  • Restrict employees from accessing information they do not need to perform their duties, and segregate cash receipt duties among several different employees;
  • Regularly review manual journal entries focusing on entries posted to cash, accounts receivable and sales, and,
  • Install active and passive customer/employee complaint mechanisms such as customer password protected website screens.

Employers want to trust those they have hired, but remember an ounce of prevention is worth a pound of cure. Losses from fraud can have a significant impact on your company’s profitability, as the business owner above found out. He was being skimmed by one employee who had been with him for over 15 years and two accomplices who reported to her.

Gary Miller is CEO of GEM Strategy Management Inc., which advises middle-market private business owners how to prepare to raise capital, sell their businesses or buy companies. 970.390.4441 gemstrategymanagement