My Life Among Embezzlers - Prevent Theft at Your Business

Baiting the trap
Baiting the trap

In my previous career I was a bookkeeper and worked for many interesting and varied companies. They all had one thing in common. They had cash and they had employees - and the employees were stealing the cash.

Without exception.

Call me a cynic but…well, just call me a cynic. Young or old, rich or poor, male or female, uneducated or college graduate, I learned during my tenure that people cannot resist the lure of "free" money.

There were never elaborate schemes or even efforts to conceal the thefts. People took the money because it was there and no one was paying attention. These were crimes of opportunity. The thieves used the cash to buy mundane necessities, luxury items, vacations, video games for their kids, pets, furniture, sporting goods, girlfriend gifts, dental work, and at least one stereo system. It was sad, amusing, and maddening to track their purchases. Only once I could not catch the thief, but did stop the theft. The rest of the time their sticky fingerprints were so obvious it wasn't even sporting.

So, how does this affect you and your business? It's your hard-earned money. Wake up and pay attention! I guarantee:   if you have unguarded cash, you have an employee busy stealing it.

The Temptations

Money makes the world go round
Money makes the world go round

Don’t give one person total oversight and authority over cash and accounting functions.

I was hired by one small company to help the Chief Financial Officer. "Terry" was the son of a founding partner and entrusted with all the accounting duties. Oddly, he was extremely territorial and wouldn’t give me any real work. He would assign me a 30-second task and not check back for hours. Out of shear boredom I started poking through the files and going over "the books".

I soon discovered that Terry was stealing $300 a day out of "petty cash" and using company checks to pay for his own personal expenses. In little over a year he stole $50,000 and spent it on tires, shoes, clothing, copper cook ware, a new dishwasher, a play set for his kids (at least he shared the wealth), French lessons for his wife, and about 200 six-packs of beer. (He was an alcoholic and drank his lunch every day).

Terry made no attempt to hide what he was doing. He had no need. The business owners trusted him implicitly and paid no attention. After the discovery Terry took an extended leave of absence and the managers remained in a state of denial until a Federal Marshall showed up with a padlock for the front door. Terry had also neglected to remit the company's payroll taxes.

At my very next job I encountered an equally ham-handed, but far more spectacular, embezzlement. My boss was the company controller, a lady named Margaret, who had been with the company just three months. Margaret explained one of my duties was to reconcile the monthly credit card expenses for the 60 employees who traveled extensively on company business. But she would delay transferring the task because she did not want to overburden me with work. How nice of her.

Within three weeks I discovered an anomaly in the financial statements. Although it was only the fourth month of the fiscal year, the company's principal and interest payments on its business loans were already over the annual budget. I showed this to Margaret who said she would investigate the problem when she came back from vacation. She was taking her daughter and her daughter's friend to Hawaii for two weeks. How nice AND generous of her.

Being an employee of initiative and industry, I decided to surprise Margaret and correct the discrepancy myself. I soon found a series of company checks issued to the bank that covered the company credit cards. Each check was for an even amount in the thousands of dollars; $3,000, $5,000, $10,000 - even $15,00 - all posted to the principal and interest account.

I assumed Margaret was too busy to reconcile the credit card expenses and instead posted the balances in a holding account until she could sort it all out. I assigned myself the task of doing the reconciliation and asked the company president for a key to Margaret's locked file cabinets where she kept the credit card statements.

Margaret was indeed surprised when she came back from vacation.

The statements revealed spectacular amounts charged for restaurants, clothing, jewelry, home furnishings, cosmetics, and personal services. Margaret had charged over $60,000 in just four months and tried to hide it by posting it to loan servicing. She was fired during a dramatic scene in the President's office and left in disgrace. But her legacy lived on for another month as the charges from her Hawaiian vacation began arriving via company credit card. She apparently had a very good time.

The Moral

There should be at least two people in the accounting department who back each other up and check each other’s work. If you are a very small company and only have one person in accounting, then you will have to provide the second pair of eyes. Make it known that you “spot check” invoices, take the books home to review, monitor purchase orders, approve other employee’s expense reports, and analyze expense trends.

Theater Theft Mystery

A happy ending to the show
A happy ending to the show

Always reconcile cash with receipts.

Cash is an enormous temptation and employees learn fast when you don’t have a handle on how much you have. I worked for a municipality that ran a small theater. Unnumbered tickets were sold by volunteers from the box office and each performance sold out. The take was always around $850. Since these were public funds, I insisted the theater manager start using numbered tickets so I could reconcile the cash. I would dole out the tickets before each performance; one ticket per seat. The manager would return any unsold tickets and the cash. Since I knew exactly how many tickets were sold, I knew exactly how much cash should be there.

Being an artsy type, the theater manager howled in protest. I was paranoid. I was too rigid. I was a typical pain-in-the-neck bean counter only focused on money. Since all this was true I had my way and the numbered tickets were issued. Box office receipts immediately grew to $1,000 per performance and never dropped below that again.

Obviously, one of the society matrons who volunteered in the box office had been skimming receipts.

We applied the same principle to popcorn sales. I issued a certain number of popcorn bags. The unused bags were returned the next day along with the cash. Overnight, popcorn revenues, always a loss leader, suddenly increased enough to cover costs and generate a small profit. The teenagers who manned the popcorn stand, children of the society matrons in the box office, had been skimming receipts.

The Moral

Every transaction should have a receipt and receipts should be reconciled with cash within 24 hours. Sometimes you must be creative in finding ways to do this as we were with the theater tickets and popcorn bags. The theater manager never thanked me for increasing her revenues, but she started designing beautiful tickets that depicted scenes from the productions. People began to keep them as souvenirs and the manger got a big write-up in a local magazine. The publicity was wonderful and shortly after she raised ticket prices.

Sticky fingers
Sticky fingers

The person who collects the cash should never reconcile the receipts.

I found this to be the most common cause of embezzlement, especially if you are selling a service rather than a product.

I worked at a dentist's office where the receptionist collected the customer payments, reconciled them, and turned them over to me for posting and deposit. Over time I became suspicious because the cash was always in large bills, though I would sometimes see clients counting out ones and fives and even quarters and dimes.

I kept track of services billed and soon learned the receptionist shredded invoices for very minor services and pocketed the cash. She wouldn't take more than $10 at a time and wouldn't steal every day. But it added up over time. The dentist did not believe his trusted receptionist was a thief until I "baited" the cash box.

Every few days I would put an extra $5 or $10 in the box. The receptionist never reported the overage and would pocket the cash. Convinced, the dentist let her go and I changed the collection and reconciliation process. But the dentist didn't like me much after that and I quit. I suppose he thought I was devious. I was devious, but I was protecting his money.

Baiting the petty cash box became my favorite test for new employees. Most passed, probably because they knew the trick already. But one accounting assistant took the bait, literally, more than once. I let her go, not just for stealing, but for being stupid.

Beware of Ghosts

Cross train your employees, especially those who do your payroll.

The scariest thing in the accounting office was the ghosts. I saw them twice. The first time I was just out of school and working for an international engineering firm in San Francisco. They had employees throughout the United States, China, Singapore, Taiwan, and Thailand. Most were living, some were dead, and a few I'm pretty sure never really existed in the first place. But we would make out payroll checks for them anyway and the partners would pick them up, one ghost check for each partner. I was nosy, a good trait for a bookkeeper, so I once compared the hand-written endorsement on the backs of the partner's checks with those of their ghost. They were the same. The partners were swindling the IRS but it wasn't my job to care.

I saw the ghosts a second time while working a temporary job for a flower grower. He had a large crew of migrant farm workers tending the fields, most of them Mexicans on temporary work visas. The turnover was frequent and continual - a perfect ghost opportunity. The payroll person tripped herself up one day by giving all the payroll checks to the foreman who took them to the crew in the field. When he returned one check unclaimed, the payroll lady said it was an error and that she would void the check. Voiding payroll checks was unusual so the comment stuck in my mind and when the bank statement arrived I took a look. There was no break in the check number sequence - no check had been voided.

Remembering the partners at the engineering firm, I found the payroll lady's canceled check and pulled all the others that cleared the same day. Then I compared the endorsements and found her signature on a ghost check. I went back over several months and found a ghost check for each payroll - sometimes two. Who knows how long she had been cleaning up at the expense of the flower grower, but it was her own stupid mistake that caught her.


Who you gonna call?
Who you gonna call?

The Moral

Cross train your employees, especially those who do your payroll. This is simple common sense. If only one employee knows how to do the payroll, how will it get done if that person gets sick or suddenly quits? It  also brings a second pair of eyes to notice anything unusual. Employees will remain more honest if they know somebody else is looking at their work.

It adds up fast
It adds up fast


Make people take vacations.

I personally never worked with someone who refused to take vacations, but most people have heard of the devoted employee who never missed a day of work for years. Turned out it was because he or she was stealing hand over fist and couldn’t take the chance that someone would step into their job and notice the discrepancies. I, of course, caught Margaret this way when she was vacationing in Hawaii on the company's dime.

Beware of employees who are too territorial.

I worked at an alarm parts distributorship where one clerk absolutely refused to let anyone else process purchase orders for a certain vendor. Only she knew how to deal with this vendor, or so she said. It turned out she was ordering drop-shipments of the vendor’s products to her home and reselling them.

Change independent auditors every three years.

Even if you have an excellent and trusted auditor, give him or her a break every three years and get a different company in there. Auditors use different methods and techniques. If you use the same auditor year after year, employees will learn where they look and how they conduct the audit. That gives the employee the chance to create embezzlement systems in areas the auditor isn’t checking. Bringing in a new auditor can foil such schemes. I also worked for one company where the auditor was in cahoots with the thieving employee! Think Enron.

Trust no one.

I already admitted I'm a cynic. But I've seen enough to support my philosophy. I recall the department manager who charged gifts for his girlfriend to his office supply budget; the double-dipping salesman who recylced his expense receipts; the district office manager who floated cash receipts to fund drug deals; the clerk who stole blank checks to buy groceries at Costco; and the accounts receivable clerk who ran a Ponzi scheme off the receipts.

What else can I add?  It's your money. 

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