August 24, 2011
By Salvatore Armao

Over a seven-year period, a 58-year-old woman embezzled almost $43 million from her union.
She was the Funds Administrator of the Sandhogs Union Local 147 of the Laborers International Union of North America. It was the largest case of fraud in 2010.

All organizations are susceptible to fraud. However even the most extreme cases of fraud, like the one at Local 147, can be prevented if the proper controls are in place. These preventative strategies can put limits on the opportunities available for someone to misappropriate company assets.

In most cases a person who commits fraud holds a position of trust and has access to financial assets, such as a bookkeeper, controller or chief financial officer. This person may encounter a serious financial or personal problem that is too personal to share with anyone else. They may rationalize to themselves that they will eventually resolve the problem on their own, and that they are just temporarily dipping into company funds. A financial need or pressure, a perceived opportunity and a rationalization form the three legs of the “Fraud Triangle,” according to the theory developed by well-known fraud scholar Donald R. Cressey.

Women are more likely to be major embezzlers than men, according to a recent report by Marquet International, Ltd., a consulting firm that studied major embezzlement cases in the United States during 2008, 2009 and 2010. Also, embezzlers tend to act alone — sole perpetrators commit the vast majority of these crimes. On average major embezzlement schemes last about four and a half years.

Forged or unauthorized checks, fraudulent reimbursements, payroll schemes, theft of cash receipts, unauthorized electronic transfers and vendor fraud schemes are the most common embezzlement schemes, according to the report. Financial problems, gambling or other addictions, desire to live lavishly, substance abuse and support of a personal business are the main categories of motivating factors.

To protect your organization from becoming a victim of fraud, you must institute internal checks and balances that make it difficult for one individual to undermine the system. Some controls that organizations can put in place to minimize the possibility of fraud are simple. For example, all bank statements and government correspondence should be received unopened and directly by the owner or chief executive. That way if an employee was forging checks, the checks could not be removed before being seen by anyone else. Additionally, it is typical for fraudsters to fail to pay payroll and income tax liabilities because they have stolen the funds necessary to pay those liabilities and when the government sends a delinquency notice the perpetrator will destroy it before anyone sees it.


Other procedures that should be in place are as follows:

• Require employees who have access to assets or the recording and reconciling of them to take vacation and have someone else perform their job while they are away.

• Limit the ability of employees to add or delete vendors and customers from the accounting system.

• Limit the ability of employees to add or delete employees from payroll.

• Use passwords to limit access to computer programs.

• Have all bank reconciliations prepared by someone who does not record receipts and disbursements.

• Separate the physical possession of assets from the recording of assets. For example, the person who prepares and or takes the deposit to the bank should not do any bookkeeping.

Although the ability to establish some of these controls requires several employees in order to properly segregate the duties, many of them can be easily adopted with only one or two employees. In order to discourage perpetrators from committing fraud, you have to create the perception that there are preventive controls in place. If you don’t, you leave yourself vulnerable to fraud.



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