EMPLOYEE EMBEZZLEMENT
by
Albert G. Marquis
In June of 1999, it was discovered that an employee of the Greater Las Vegas Association
of REALTORS® had been embezzling funds for a long time. In 1999 alone, she embezzled
$111,000. The embezzlement history may go back as far as 1992 and may involve as much as
$700,000. Needless to say, this was a disaster of monumental proportions.
Employee embezzlement is the worst sort of financial loss. Generally speaking,
employees embezzle funds in order to feed a gambling or drug habit. Consequently, when the
embezzlement is discovered, the guilty party has no assets. Therefore, the money is simply
gone, and there is virtually no hope of recovery. You might as well flush cash down the toilet or
burn it in your fireplace.
Employers can prevent embezzlement. To do so, however, you cannot sit back and hope
for the best. You must be proactive. You must understand each aspect of your accounting
procedures. And you must ensure that steps are taken which will provide the necessary checks
and balances.
I.
WHO EMBEZZLES?
Unfortunately, most employers have a misconception about who is the most likely
embezzler. They envision some low-level employee, dressed like a homeless person, who
sneaks around when the office is closed stealing cash out of individual drawers. In truth, such
employees present little risk. At most, they pick up a few dollars here and there.
The real risk comes from the employee you trust the most. Time after time, employers
are shocked to learn that the trusted bookkeeper, the controller or even the CPA was routinely
embezzling funds. Movie stars and sports figures such as Kareem Abdul-Jabar have lost entire
fortunes to trusted accountants or financial advisers. The embezzler who can do you the most
harm is the one who leads you to believe that he or she can be trusted.
When I was going to college, I worked part-time at the Nordstrom’s shoe store in the
university district of Seattle. The manager of the store, a middle-aged woman, was a stickler for
the rules. She insisted that all of the young salesmen tow the line at every turn. She was
unforgiving when someone failed to follow the proper procedure. But one problem that we
continually had at the store was a cash shortage. So Nordstrom’s had private investigators install
a camera in the ceiling. Lo and behold, there was the manager on film stuffing $20 bills down
the front of her dress. The smart embezzler ingratiates himself or herself with the employer in
order to instill trust and confidence, which in turn gives him or her the opportunity to embezzle
the employer’s funds.
II.
WHY DO EMPLOYEES EMBEZZLE?
Certainly most employees are honest. They account for every dollar, and they would not
steal someone’s money even if they had the opportunity. But there are two activities which can
override this conscious concern: drug abuse and gambling.
As a result of the criminalization of drugs, the cost of a drug habit is exorbitant.
Criminals can engage in price fixing, price gouging, bait and switch or any other activity
unavailable to the legitimate business person. A small quantity of heroin that would cost $10 on
the legitimate market can cost $1,500 or more on the streets. Once a person becomes addicted,
he cannot help himself. He does not earn enough money to purchase the drugs he needs. His
only alternative is to steal and embezzle funds. While the casual drug user is not necessarily a
risk to employers, the addict is a huge risk.
The addicted gambler presents a similar risk to the employer. At first, the gambler
“borrows” a small amount of cash to cover his losses. Soon that money is lost, and he is forced
to “borrow” more in order to win it all back. Of course, the hole he has dug for himself
continues to grow deeper as thousands of dollars are embezzled and gambled away.
Another type of embezzler, rare but possibly the most dangerous is, the shrewd individual
who has a premeditated plan to become rich with embezzled funds. He stashes the money away,
intending to flee as soon as there is any indication that he has been detected. Before the
employer ever realizes what has happened, the embezzler and the money are long gone, never to
be heard from again. No matter how the money is embezzled, it’s gone, gone, gone.
III.
HOW DO EMPLOYEES EMBEZZLE MONEY?
It is impossible to compose a complete list of all of the different ways that employees can
embezzle money. Embezzlement schemes are like tax loopholes. As soon as you close one off,
another is found. Nevertheless, there are several very common scenarios.
A.
No Customer Receipts.
When a business accepts payments from a customer without providing written receipts,
the embezzler sees an opportunity. If the employee receiving payments puts the cash in his
pocket or endorses checks to himself (which is somewhat more difficult), who is going to know?
A variation on this scheme is the double receipt book. In this case, the employer has
instituted a rule that all customers must be given a receipt, and he periodically checks to ensure
that this is happening. In addition, the employer routinely cross-checks his receipts with the
bank deposits. Unknown to the employer, however, the embezzling employee has a second
receipt book. When the employee receives cash payments or blank checks, he gives the customer
a receipt from the second book. Thus, the books always balance.
B.
The Sticky-Fingered Depositor.
It does little good to make sure that all customer receipts come into your office if the
funds never reach the bank account. Those responsible for depositing funds in your bank
account sometimes cannot resist the temptation to take a cut for themselves.
The obvious example is the employee who takes cash to the bank. In the move “Psycho,”
that is why Vivian Lee ends up at the Bates Motel. Instead of depositing the envelope of cash in
her employer’s bank account, the envelope had found its way into her purse, and she had split
town. One must question why an employer would so tempt an employee.
C.
Altering Deposit Slips.
Another embezzlement method is to alter the deposit slips. Obviously if the employee
can get his hands on additional deposit slips, he can legitimately deposit a lesser amount of
money than was entrusted to him. Of course, if someone else is making out the original deposit
slip and checking the deposit receipt, this type of embezzlement cannot occur. But if an
employer lets down his guard for even a minute, large sums can disappear.
“Lapping” is a sophisticated variation of this technique that was used by the GLVAR
employee. Between 1992 and 1999, over $700,000 was embezzled by the person making the
daily deposits. Fortunately (for her), she also had the responsibility of reconciling the bank
statements. To make the books balance, she continually inflated a figure known as “deposits in
transit.” If the employer does not independently review the bank reconciliations, lapping can go
on for years.
D.
Fraudulent Payments.
Embezzlements can also occur in the accounts payable department. Every day, checks go
out the door that represent the payment of cold, hard cash. Many employees cannot resist the
temptation.
The most obvious type of payment fraud is the forged check. If an employee (or anyone
else for that matter) can get his hands on blank checks, he can easily forge the owner’s signature
and make off with a substantial amount of cash before his misdeeds are detected.
Some employers think they can guard against this type of fraud by simply making sure
that each check that is written is in sequential order. In other words, if no checks are missing,
then there can be no forged checks. However, the clever forger doesn’t take blank checks off the
top; he removes blank checks from the bottom of the stack. Therefore, the person writing the
checks on a daily basis may have no knowledge that checks have been stolen and forged.
Another type of payment fraud is the altered check. In this case, the payee doesn’t steal
checks nor does he forge signatures. Instead, he cleverly alters the amount of the payment.
Another type of fraudulent payment is the “fictitious payee.” Unless the employer
insures that all checks match up with valid invoices, the employee writing the checks can make a
few payable to himself, to a friend or relative, or even to a legitimate sounding company, which
just happens to be a shell set up by the employee.
Some employers may take solace in the fact that banks are generally liable if they pay on
a forged or altered instrument. However, the bank has no liability if it can establish contributory
negligence by the employer. Thus, if the employer leaves blank checks laying around or even if
they are not securely locked, the bank may be able to establish negligence. Without a doubt, the
employer has an obligation to check his monthly bank statements. If he has not otherwise been
negligent and detects a wrongful payment promptly, he stands a good chance of recovering from
the bank. However, if the wrongdoer is reviewing the bank statements, or if no one is reviewing
the bank statements, chances are the bank will have no liability.
IV.
HOW CAN EMPLOYERS GUARD AGAINST EMBEZZLEMENT?
Generally speaking, employers can guard against dishonest employees by insisting on
strict adherence to established procedures, including a system of checks and balances and prompt
review of monthly bank statements. At a minimum, employers should insist that:
Receipts or other entries must be made for each and every customer payment. A different
person should fill out the deposit slip, and someone else should insure that the daily receipts
match the daily deposits.
Cash, in particular, should be strictly controlled.
Blank checks must be securely locked and stored.
A knowledgeable person must sign each check and insure that the payee is legitimate.
A person different than the one writing the checks should review each and every bank
statement.
The bank statement should be promptly balanced each and every month.
Any perceived irregularities should be promptly investigated.
Generally speaking, trust is a wonderful thing. However, too much trust can make
criminals out of your employees, and the ultimate result could be the bankruptcy of your
business. Safeguard your funds. Don’t wait until it is too late.
Albert G. Marquis is a Las Vegas attorney representing the Greater Las Vegas
Association of REALTORS®. NAR Legal Affairs thanks him for granting us permission to use
this article.