Home » In The Fight Against Embezzlement Fraud, Employers Should Trust — But Verify

In The Fight Against Embezzlement Fraud, Employers Should Trust — But Verify

by | Jun 29, 2021

EMBEZZLEMENT FRAUD

Recently, the former comptroller of a Maryland dance academy pleaded guilty to fraud after she gambled away nearly $1.5 million of school funds at a local casino. One embezzlement fraud conviction is bad enough. But the woman in question had been convicted just eight years before of stealing money from a related dance organization, also to cover her gambling debts.

News reports quoting an FBI affidavit said the woman, Sophia Kim, treated the dance academy’s funds “as her own personal bank account,” and during a period of nine months in 2018, wrote checks to herself and used her academy bank card 120 times at the MGM Grand Casino near her home in Temple Hills, Md. This came after she had served two years in jail after being found guilty in 2013 of embezzling money—most lost at New Jersey casinos—from a foundation that channels money to the academy and other Unification Church-affiliated dance organizations. 

It begs the question: How did a woman with a criminal conviction for embezzlement fraud and a clear gambling problem get hired for a sensitive financial position? And why didn’t the school catch on earlier that it was being defrauded?

While the particulars of the case are unique, the situation is all too common. The Association of Certified Fraud Examiners estimates that companies lose 5 percent of their annual revenues to fraud, and research has found that most employees acknowledge they would steal from their employers under the right circumstances. 

Yet many organizations fail to perform even the most cursory due diligence on prospective employees, even those for sensitive financial positions.

In fact, 48 percent of organizations that have experienced employee fraud performed no background check on the perpetrators before they were hired, according to data from the ACFE Report to the Nations. Of the 52 percent of organizations that did conduct a background check, only three-quarters conducted a criminal check. And 13 percent “uncovered a red flag in the perpetrator’s background and proceeded with the decision to hire them anyway.”

A MORE RIGOROUS APPROACH

The dance academy has not commented on the case, and it’s unclear whether it conducted a background check or was aware of the conviction stemming from embezzlement fraud at a related organization. Kim was a Unification Church member, according to news reports, and had married a church lawyer. She told an interviewer in 2020 that she had never intended for her gambling to hurt the academy.

Employers may cut slack to potential hires and current employees with red flags in their background, who have friends and family working in the organization, or who express remorse for bad behavior. And they may lull themselves into a false sense of security about workers, especially financial staff. They may tell themselves: “My bookkeeper is the first one in and the last one to leave”; “they’ve been with us for years”; “but I pay them so well’; “our accountant gives us a clean bill of health every year.”

To prevent and detect embezzlement fraud, organizations need to take a more rigorous approach. Fraud can happen in any workplace, and employers must consider who has the opportunity and is in a position to conceal it. 

Clearly, organizations should carefully vet potential hires, looking for criminal activity and other red flags and ensuring that a fraudster does not enter the organization in the first place. And for existing employees, controls should be put in place to help reduce the opportunity and temptation for workers to engage in fraudulent activities.

KEY QUESTIONS TO CONSIDER

When it comes to the organization’s finances, a useful rule of thumb is never to leave people in a position to check their own work. A transaction is like a circle, and no one person should ever be allowed to complete the circle by themselves.  

Ask the following questions:

• Who has access to the money coming into the enterprise? Do not leave them with the authority to post or edit customer transactions.

• Who has access to the money going out?  Do not leave them in a position to create new vendors or employees – not to mention the authority to sign checks or execute bank transfers.

• Who orders parts or services; who opens the mail; who takes the money to the bank; who writes the checks; who mails the checks; who reconciles the bank statement? Look for ways to segregate duties so that a single employee does not have control over an entire aspect of a financial process.

TIPS FOR SMALLER BUSINESSES

In small businesses with only a handful employees, doing this kind of segregation of duties may be difficult. In those cases, the business owner can and should find ways to insert themselves into the process.

Cash receipts:  Ideally, the employee collecting money and posting payments should not be the employee who bills customers.  But if the organization only has one employee, the owner should retain control over administrative rights to post credits, write-offs, or void customer transactions. If you do allow them administrative rights, stay informed. For instance, verify the electronic Audit Trail – an invaluable feature of QuickBooks and a feature most other accounting programs have as well.

Cash disbursements:  If a bookkeeper is the only one to disburse money and reconcile the bank statement, owners should ensure that bank statements and cancelled checks are delivered to them— preferably to their homes—and reviewed before they are provided to your bookkeeper.

Debit or credit card purchases:  The bookkeeper is likely paying these bills. Don’t give them authority to increase limits or request additional cards.  Put daily and monthly limits on cards and monitor them regularly.  Receipts should be submitted – and reviewed – before the bill is paid.

In the case of the dance academy, the comptroller was able to scam the organization because of her unfettered access to the organization’s resources. She could siphon away seven figures in dozens of transactions (at a casino no less) for months on end. 

Owners and managers should ask themselves if their own organizations are similarly vulnerable. Do they properly screen potential employees? Can they spot red flags and warning signs that an employee may be engaged in wrongdoing? (Read this previous blog post for more information on behaviors to watch.) Do they have controls in place that will discourage fraud and help them detect trouble if it should occur? 

Managers and owners tend to place great faith in the honesty of their employees. It’s natural to want to trust your colleagues. Trust, yes. But verify.

Contact us to learn more about ways our team can help you fight and investigate fraud in the workplace.