Fraud & Embezzlement:
How it Happens
& How to Prevent it!
Edward J. McMillan, CPA, CAE
P.O. Box 771
Forest Hill, MD 21050
Telephone: (410) 893-2308
Fax: (410) 838-7696
Email: emcmillan@sprintmail.com
Website: www.nonprofitguru.com
CHECK REQUEST
Payee:
Amount:
For:
Requested by:
Date:
Approved by:
Date:
US Postal Service
$2,000.00
Postage
Sally Geek
06/30/yy
CHECK REQUEST
Payee:
Amount:
For:
US Postal Service
$2,000.00
Postage
Requested by:
Date:
Sally Geek
06/30/yy
Approved by:
Date:
C. E. Officer
06/30/yy
CHECKS
1234
Date
Pay to
the order of
06/30/yy
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~~~~~~ Dollars
Memo
897140033:00456321
1234
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
CHECKS (Continued)
1
1234
Date
Pay to
the order of
06/30/yy
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
Memo
897140033:00456321
1234
CHECKS (Continued)
1234
Date
Pay to
the order of
06/30/yy
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
Memo
897140033:00456321
1234
CHECKS (Continued)
1234
Date
Pay to
the order of
06/30/yy
Sally Geek
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
Memo
897140033:00456321
1234
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
Sally Geek
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
Sally Geek
897140033:00456321
1234
CHECKS (Continued)
Pay to
the order of
Sally Geek
Two thousand and 00/100
Memo
897140033:00456321
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
BANK STAMP
BANK STAMP
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
200000
BANK STAMP
BANK STAMP
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
200000
BANK STAMP
BANK STAMP
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
US Postal Service
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
897140033:00456321
1234
200000
BANK STAMP
BANK STAMP
CHECKS (Continued)
1234
Date
06/30/yy
Pay to
the order of
Sally Geek
$2,000.00
Two thousand and 00/100 ~~~~~~~~~ ~~~~~Dollars
C.E. Officer
Memo
Sally Geek
897140033:00456321
1234
CHECK REQUEST
Payee:
Amount:
For:
Requested by:
Date:
Approved by:
Date:
US Treasury
$1,410.00
Federal Payroll Taxes
Aunt Bea
04/19/yy
CHECK REQUEST
Payee:
Amount:
For:
US Treasury
$1,410.00
Federal Payroll Taxes
Requested by:
Date:
Aunt Bea
04/19/yy
Approved by:
Date:
Andy Taylor
04/19/yy
CHECKS (Continued)
2345
Date
04/19/yy
Pay to
the order of
US Treasury
$1,410.00
One thousand four hundred ten and 00/100~~~~~ Dollars
Memo
897140033:00456321
2345
FEDERAL TAX PAYMENT COUPON
$1,410.00
CHECKS (Continued)
2345
Date
06/30/yy
Pay to
the order of
US Treasury
$1,410.00
One thousand four hundred ten and 00/100~~~~~ Dollars
Andy Taylor
Memo
897140033:00456321
2345
FEDERAL TAX PAYMENT COUPON
$1,410.00
FUNDS TRANSFER
Transfer:
$35,000
From:
(Lock Box Account)
To:
(Disbursing Account)
Signature:
Date:
FUNDS TRANSFER (Continued)
Transfer:
$35,000
From:
(Lock Box Account)
To:
(Disbursing Account)
Signature:
Date:
Andy Taylor
03/17/yy
CHECK REQUEST
Payee:
Amount:
For:
Requested by:
Date:
Approved by:
Date:
Aunt Bea
$25.00
Local Travel
Aunt Bea
Andy Taylor
CHECKS (Continued)
4567
Date
Pay to
the order of
08/17/96
Aunt Bea
$25.00
Twenty-five and 00/100~~~~~~~~~~~~~~~ Dollars
Memo
8935678705310
4567
CHECKS (Continued)
4567
Date
08/17/96
Pay to
the order of
Aunt Bea
$25.00
Twenty-five and 00/100~~~~~~~~~~~~~~~ Dollars
Memo
8935678705310 4567
Barney Fife
FUNDS TRANSFER (Continued)
Transfer:
$35,000
From:
(Lock Box Account)
To:
(Disbursing Account)
Signature:
Date:
Andy Taylor
03/17/yy
FUNDS TRANSFER (Continued)
Transfer:
$35,000
From:
(Lock Box Account)
To:
(Disbursing Account)
Signature:
Date:
Andy Taylor
08/17/yy
CHECKS (Continued)
4567
Date
08/17/96
Pay to
the order of
Aunt Bea
$25.00
Twenty-five and 00/100~~~~~~~~~~~~~~~ Dollars
Memo
8935678705310 4567
Barney Fife
CHECKS (Continued)
4567
Date
Pay to
the order of
Aunt Bea
08/17/96
$
Dollars
Memo
8935678705310 4567
Barney Fife
CHECKS (Continued)
4567
Date
08/17/96
Pay to
the order of
Aunt Bea
$35,000.00
Thirty Five Thousand and 00/100~~~~~~~~~~ Dollars
Barney Fife
Memo
8935678705310
4567
CHECK REQUEST
Payee:
Amount:
For:
Requested by:
Date:
Approved by:
Date:
Walter Nerd
$100.00
Petty Cash
Walter Nerd
04/15/yy
CHECKS (Continued)
6453
Date
Pay to
the order of
Walter Nerd
$ 100.00
One hundred and 00/100~~~~~~Dollars
Memo
8935678705310
04/15/96
6453
CHECKS (Continued)
6543
Date
Pay to
the order of
04/15/96
Walter Nerd
$10, 100.00
Ten thousand One hundred and 00/100~~~~~~~~Dollars
Memo
8935678705310
6453
INTERNAL CONTROLS
An effective and documented system of
internal controls is an absolute must if
your organization is serious about
protecting itself against employee
dishonesty.
INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
How does your organization stack up? The adequacy of the
internal controls currently used by your organization can be
quickly gauged by answering the following:
YES
NO
1)
2)
3)
4)
Are copies of bank statements forwarded offsite to the CEO and are checks and debit
memorandums reviewed?
Are copies of the credit card detail forwarded
offsite to the CEO and are charges reviewed?
Are two signatures required on all checks
and wire transfers?
Does accounting attach a copy of the bank
reconciliation to the monthly financial
statements?
Copyright 2005, Edward J. McMillan, CPA, CAE
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INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
5)
6)
7)
8)
Are financial personnel prohibited from
being signers on all bank accounts?
For remittances via the mail, do you take
advantage of a bank’s Lock Box service?
Are checks that are received in the mail
immediately endorsed by whomever opens
the mail?
After checks have been endorsed, do you
prohibit employees other than accounting
from coming into contact with the original
checks?
Copyright 2005, Edward J. McMillan, CPA, CAE
YES
NO
____
____
____
____
____
____
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INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
Does your restrictive endorsement stamp
NOT include your account number?
10) Is the amount on manual checks protected
with a check protector machine?
11) Does your CPA firm undertake a thorough
analysis of your internal controls and do you
take their recommendations for improvement
seriously?
12) Are all employees who handle checks
bonded?
YES
NO
____
____
____
____
____
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____
____
9)
Copyright 2005, Edward J. McMillan, CPA, CAE
INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
Is the amount of your Fidelity Bond adequate
and are you aware of any contractual
obligations concerning it?
14) Do you require employees to take at least
one full uninterrupted week of vacation
annually?
15) Do you require key employees to be subject
to a “Management Day”?
16) Is the check supply under lock and key?
YES
NO
____
____
____
____
____
____
____
____
13)
Copyright 2005, Edward J. McMillan, CPA, CAE
INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
17)
18)
19)
20)
21)
22)
Are all checks signed manually?
Is the check stock non-scannable?
Are two people involved in preparing payroll
and remitting payroll taxes?
Do you have a “Conditions of Employment
Agreement”?
Do you have a “Conflict of Interest
Agreement”?
Are your internal control policies in writing?
Copyright 2005, Edward J. McMillan, CPA, CAE
YES
____
____
NO
____
____
____
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INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
Does your CPA firm or Internal Audit
Committee visit the office during the
“Window of Opportunity” for embezzlement?
24) Have you instructed the bank not to change
authorized signers without approval of
management?
25) Do you occasionally test cash, check and
credit card transactions?
26) When employees terminate, do you conduct
an “Exit Interview”?
YES
NO
____
____
____
____
____
____
____
____
23)
Copyright 2005, Edward J. McMillan, CPA, CAE
INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
Do you prohibit making checks payable to
acronyms?
28) If your organization is known by its
acronym, do you encourage payment be
made to its full legal name?
29) Do you take advantage of your bank’s
Positive Pay service?
30) Did you eliminate employee credit cards?
YES
NO
____
____
____
____
____
____
____
____
27)
Copyright 2005, Edward J. McMillan, CPA, CAE
INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
Do you do thorough background checks on
key employees?
32) Do you have approved vendor files and do
you investigate new vendors?
33) Do you have a system in place whereby
employees are encouraged to report
suspicious or unethical activity?
34) Do you have a formal “Whistle Blower
Protection” policy?
YES
NO
____
____
____
____
____
____
____
____
31)
Copyright 2005, Edward J. McMillan, CPA, CAE
INTERNAL CONTROLS
How Does YOUR Organization Stack Up?
(Continued)
The previous questions is of course just a short managerial
evaluation of your existing internal controls. Hopefully, the
answers to most if not all of the questions are “yes.”
If not, give serious consideration to a thorough analysis of your
internal controls and make changes for improvement accordingly
to ensure your organization’s assets are protected.
The FRAUD Triangle
Incentive
Opportunity
Rationalization
Copyright 2005, Edward J. McMillan, CPA, CAE
A Few Facts
You do not know what is going on in peoples’ personal
lives!
 In almost every situation where fraud has been
discovered, the guilty party is above suspicion!
 And finally. . . Remember that the purpose of effective
internal controls is to keep honest people honest by
removing the “opportunity” factor of the fraud triangle!

Copyright 2005, Edward J. McMillan, CPA, CAE
Plan of ACTION
If you find yourself the victim of Fraud:
1)
2)
3)
4)
5)
6)
Call your attorney and CPA for advice on how to handle the
situation initially
Call your bank and freeze all accounts until the situation is
resolved
Change your computer passwords
Preserve the evidence. Safeguard all original documents and
work from copies
Take detailed and copious notes of the incident and follow up
Know the requirements of your Fidelity Bond
Copyright 2005, Edward J. McMillan, CPA, CAE
Plan of ACTION
(Continued)
7)
When confronting the person:
•
Protect yourself and fellow employees if there is any
possibility of an incident
•
The discussion should never take place in the offender’s
office, etc. Meet in a neutral location
•
The discussion should take place before or after work hours
•
Always have a witness present. This is of particular
importance if this is a male-female discussion
•
Make sure you get your credit cards, keys, etc. from the
offender and consider changing door locks if necessary
•
The offender should be escorted out of the building and not
be allowed back to his/her office, etc. (Note the “Conditions
of Employment Agreement”)
Copyright 2005, Edward J. McMillan, CPA, CAE
Plan of ACTION
(Continued)
8)
9)
Get advice from counsel on how to relate the circumstances of
dismissal to other employees, etc. and how to handle references
And when it’s all over. . . Work with an experienced CPA to
thoroughly review your system of internal controls and correct
whatever deficiencies that led to the problem!
Copyright 2005, Edward J. McMillan, CPA, CAE
Fraud & Embezzlement:
How it Happens
& How to Prevent it!
Edward J. McMillan, CPA, CAE
P.O. Box 771
Forest Hill, MD 21050
Telephone: (410) 893-2308
Fax: (410) 838-7696
Email: emcmillan@sprintmail.com
Website: www.nonprofitguru.com