PROTECTING YOUR COMPANY FROM EMPLOYEE THEFT

AICC 2017

ANNUALMEETING

PRESENTED BY

MITCHELL E.

KLINGHER CPA

WHY DO THEY DO IT??????

THE PSYCHOLOGY OF THEFT

Vicarious thrill

It doesn’t matter

Everyone does it

Feeling deprived

Lack of Respect

I AM ENTITLED

The thief convinces himself that he has a right to the object he desires. He needs it more than the other does. It is rightfully his.

According to the research, the dynamic that influences people to shift their moral standards is the feeling of being financially deprived.

Somehow we seem to have an infinite capacity to rationalize behavior when we feel deprived – this can cause a person to justify a new set of moral standards,

People can also feel financially deprived when they still have plenty of resources, especially if there has been a recent change in circumstance

MY PERSONAL EXPERIENCES

Controller paying the same bill from

multiple companies

Plant employee signing for half loads of pallets

Plant manager approving payroll for

non-existent employees

Accounts payable clerk creating

fictitious vendors

Controller padding payrolls – this happens

a lot

Bookkeeper forging petty cash checks and removing them from

bank statement

Waste sales remitted to personal account

of an owner

Office manager ordering 2 years

worth of supplies to obtain free

merchandise

HOW CAN YOU PREVENT IT???

THE MOST IMPORTANT THINGS……

BACKGROUND CHECKS

1

KNOW YOUR EMPLOYEES

2

MAKE SURE THEY KNOW YOU ARE PAYING ATTENTION

3

PRE-EMPLOYMENT PROCESS

Standard application approved by counsel

• Clearly stated somewhere on the application should be your policy regarding a candidate providing false, incomplete, or misleading information, or omitting information that would identify a problem

Standard document request

• Resume, letters of reference, military records, copies of diplomas or degrees, copies of transcripts – depending on the position or situation

Somewhere on the application form itself or in a separate document

• You seek the candidate’s permission to perform a credit check

PRE-EMPLOYMENT PROCESS

• VERIFY

• PERSONAL INFORMATION

• PAST EMPLOYMENT

• EDUCATION

• REFERENCES

• CRIMINAL AND CIVIL HISTORY CHECKS

• CREDIT CHECK

EMPLOYEE COMMUNICATIONS

Consider

Consider establishing and communicating to employees a means to discuss personal financial issues with you.

Communicate

Communicate to employees their fiduciary responsibilities as employees, including their duty to report suspected activity to you.

Establish and explain

Establish and explain to employees a means for them to communicate information regarding suspected activity of fellow employees

KEY DETERRENTS – RUN A TIGHT SHIP!

SEGREGATION OF DUTIES

ROTATING FUNCTIONS

MANDATORY VACATIONS

CONSISTENT ADHERENCE TO POLICIES AND

PROCEDURES

OUTSIDE CHECKS AND VERIFICATION

SURPRISE CHECKS

CONSISTENT REVIEW OF POSSIBLE PROBLEM AREAS

HOW DO YOU SPOT IT???

EMPLOYEE BEHAVIOR TO LOOK FOR

Watch for unusual

employee behavior or changes in employee

personality, attitude, or behavior

Monitor employees’

lifestyles and watch for any

noticeable changes or

activity inconsistent with

their lifestyle

Monitor for other common

signs of a potential problem.

Ensure employees take vacations and

time off and that someone else is doing their job while they are

away

Consider rearranging job responsibilities, create cross-

training opportunities,

and have employees cover other employees’

areas of responsibilities

on a regular basis

POTENTIAL RESPONSES TO TROUBLESOME SIGNS

If any signs become apparent, determine the employee’s areas of responsibility, and opportunities. Determine

Increase your level of scrutiny in the areas identified, looking for any signs that an area of opportunity has been exploited. Increase

Consider implementing additional controls or reassigning/rearranging responsibilities, even temporarily, to address your concerns.

Consider

Consider consulting with your outside accountant or someone experienced in these matters to quietly look further into the employee’s responsibilities and areas of opportunity

Consider

INDICATORS OF POSSIBLE THEFT

Customer accounts receivable growing larger and older

01

Unexplained drop in cash flows (especially with increases in sales and volume)

02

Unexplained rise in unpaid vendors

03

Missing documents or sloppy record keeping

04

Accounts out of balance or unreconciled

05

Unexplained differences in reconciliations of balances

06

Unauthorized access to computer files

07

PREDICTIVE INDICATORS

BUDGET TO ACTUAL ANALYSIS

JOB COST VARIANCES

UNEXPLAINED CHANGES IN

WASTE

HOW DO THEY DO IT???

HOW DO THEY STEAL

Paying for goods that you don’t receive

Kick-back schemes for directing purchases.

Raising the amounts of checks, invoices and vouchers after they have been officially approved.

Issuing and cashing checks for returned purchases not actually returned.

Pocketing the proceeds of cash sales and not recording the transactions.

“Lapping” (i.e., pocketing small amounts from incoming payments and applying subsequent remittances on other items to cover the shortages).

Forging checks and destroying them when returned by the bank, then concealing the transactions by forcing footings in the cash books or by raising the amounts of legitimate checks.

HOW DO THEY STEAL

Charging customers more than the invoice shows and pocketing the difference. Charging

Padding payrolls as to rates, time, production or number of employees. Padding

Failing to record returned purchases, allowances and discounts and appropriating equivalent amounts of cash. Failing

Paying creditors’ invoices twice and appropriating the second check. Paying

Appropriating checks made payable to “cash” or bank, supposedly for creditors’ accounts, payment of notes or other expenses.

Appropriating

Misappropriating cash and charging the amounts taken to fictitious customer accounts

Misappropriating

LET’S GET MORE SPECIFIC

SHRINKAGE

SQUARE FOOTAGE IN INVENTORY PLUS

FOOTAGE PURCHASED LESS FOOTAGE IN ENDING

INVENTORY EQUALS FOOTAGE

MANUFACTURED

FOOTAGE MANUFACTURED LESS

FOOTAGE SHIPPED DIVIDED BY FOOTAGE

MANUFACTURED EQUALS SHRINKAGE PERCENTAGE

Klingher Nadler LLP

SHRINKAGE CALCULATION

Klingher Nadler LLP

22

ABC SHEET PLANT

SHRINKAGE CALCULATION

MAY 2015

MSF INVOICED TO CUSTOMERS 13997

TOTAL MSF FROM VENDOR INVOICES 15,876

LESS MSF CHARGED BACK:

OVERRUNS (185)

UNDERRUNS (220)

BAD SHEETS (315)

(720)

ADD MSF RECEIVED FROM FARM OUTS 1,026

ADD MSF IN OPENING INVENTORY 29,875

LESS MSF IN ENDING INVENTORY (32,716)

13,341

UNACCOUNTED FOR MSF (SHRINK) 656

SHRINK % 4.69%

NOT GETTING PAID FOR YOUR PRODUCTS

Have an owner or designated individual

should be responsible for accepting new customers and assigning initial credit limits.

System controls should prevent unauthorized

employees from entering new customers or

making changes to existing customers.

individuals responsible for

shipping product should be

independent and separate from

individuals responsible for

recording sales and processing invoices

to customers.

A procedure should be implemented to

match shipping information with

customer invoicing on a regular basis to

ensure that every shipment to a customer is

supported by a sales invoice posted

within the system.

PAYING FOR GOODS THAT YOU DON’T RECEIVE

Severely limit who can add new vendors to your system

Conduct background checks and other due diligence on all new vendors

Use your purchase order system – severely limit and scrutinize all payments that are outside the P.O. System

Count sheets on the way in

Consistent shrinkage calculations

Take regular inventories and investigate differences

Lock down who can initiate purchases at all levels

Did I mention rotate the receiving function

VIDEO SURVAILANCE OF SHIPPING AND RECEIVING

STEALING THROUGH CASH DISBURSEMENTS

All checks should be computer generated

No checks payable to cash

Petty cash accounts aren’t necessarily petty – they need the same

rules

A human being should sign every check –

eliminate check signing machines

Have a dollar threshold that requires

2 signatures

Know your vendors – beware of misspelling or odd amounts for

transactions

Watch for odd check numbers

Totally lock down who can authorize

electronic payments and severely limit their

use

Double ditto with respect to wire

transfers

Require daily bank reconciliations

MISAPPROPRIATION OF CUSTOMER REMITTANCES

USE A LOCK-BOX

1 HAVE CUSTOMERS REMIT ELECTRONICALLY

2 CONTROL PROCEDURES FOR MAIL

• IMPORTANT NEED FOR SEGREGATION OF DUTIES

• OPENING MAIL AND MAKING CONTROL LISTING OF DEPOSITDS

• POSTING BOOKS AND RECOREDS

• RECONCILING ACCOUNTS

3 REVIEW EVERY CUSTOMER CREDIT THAT DOESN’T COME FROM CASH RECEIPTS

4

STEALING THROUGH PAYROLL

Consider automating your time tracking to a system that is integrated to your payroll system

1 Make sure there is an extra sign-off required for adding new employees and for every pay rate change and have pre-approved forms that are used with appropriate sign off’s

2 Require that payroll packages be received unopened by the owner of the business.

• Have other managers hand out the checks on a periodic basis

• Automatic transfers are convenient, but may leave you vulnerable

3 Get involved

• Require that payroll registers and reports for each pay period be generated and provided to the owner for independent review.

• Review the final payroll registers and reports for each pay period for reasonableness.

• Look for employees with PO boxes for their addresses, for pay stubs with no withholding and for any odd adjustments to the net check

4

ISSUES WITH CREDIT AND DEBIT CARDS

Original receipts must back up each purchase Back up

Specify the consequences associated with not following the rules Specify

Use one accounts with cards for each authorized individual Use

Review the activity monthly – don’t let them slide and put together months at a time Review

Do not allow debit cards Do not allow

Lead by example………. Lead by

INSURANCE PROTECTION

Usually part of the business commercial

package

Fidelity Bond’s are usually reserved for

fiduciary situations such as pension plans

Make sure that your policy includes coverage for employee dishonesty

Assess the adequacy of coverage - cost benefit

Current increases in limits will not help your

for a scheme that started in a previous year

Make sure that you understand your

responsibilities to report and cooperate under the

terms of the policy

KEY TAKEAWAYS

FORMAL CONSISTENT PRE-

EMPLOYMENT PROCESSES

KNOW YOUR PEOPLE

MAKE SURE THAT LINES OF

COMMUNICATION ARE OPEN AND

STRONG

LOCK DOWN COMPUTER ACCESS

FORMAL POLICIES PROCEDURES

SEGREGATION OF KEY FUNCTIONS

RUN A TIGHT SHIP MAKE SURE THE RULES APPLY TO

EVERYONE