By Colleen S. Vallen
Special to the Legal
As a forensic accountant, I often am hired when a client is concerned about inappropriate employee behavior and needs these concerns analyzed and addressed. In recent years, I have worked on a number of cases involving employee theft. As a result of this work, I have identified common themes present in a number of these cases.
A critical common element is reliance and trust between the employee and business owner. The employee typically develops a relationship with the owner where the employee is valued and relied upon. The employee often attempts to informally define his or her role as the person to relieve an overburdened owner of his or her workload; the employee takes control of daily business functions, freeing the owner to focus on more important business functions. This allows the employee to gain additional knowledge and access to the business’ processes and systems while limiting oversight of the individual’s activity. This is particularly an issue for smaller businesses, as the ability to segregate duties and implement controls often is challenging. As an employee becomes trusted and takes on more roles, the ability of the employee to perpetrate and conceal theft increases.
Another common theme is that the employee is knowledgeable about the business. The employee uses this knowledge to build confidence and credibility with the employer. This knowledge, however, also provides the employee with key information on the company’s policies and procedures and its internal control structure, as well as an understanding of what oversight, if any, exists. The employee often knows more about how the business functions than the owner. The employee uses this information to identify weaknesses in the systems and then exploits them to perpetrate and conceal theft.
Another theme centers on complexity. The employee frequently creates complexity in financial transactions to make it difficult for others to understand. Complexity provides two benefits. First, it enhances the employee’s value to the business, as he or she is seen as able to manage important, challenging issues. Complexity also provides the employee the ability to respond to questions that may be raised about inappropriate activity. The employee can weave an explanation that may sound plausible but not be clearly understood by the employer. This often extends the length of time the theft occurs, as early warning signs that may have uncovered the scheme are explained away.
For example, in one case, an employee was using corporate funds to pay personal credit card balances. The employee had built a relationship with the owner of the business and had advanced in the company. Throughout the employee’s tenure, the employee’s responsibilities increased and by the time the theft was identified, the employee had taken on most of the financial responsibilities of the business. The employee understood the company’s processes surrounding payables and used this knowledge to take funds from the company. The employee prepared company checks to pay personal credit cards. Instead of getting these checks signed with the legitimate payables, the employee would hold these checks aside and use a check stamp. The company’s normal procedure was to have the owner review and sign the checks, but a check stamp existed for emergency occasions. The employee was able to gain access to this check stamp and use it to sign the unauthorized checks. Further, the employee was handling the transactional recording in the general ledger systems and performing the back reconciliations, so the employee was able to conceal the fraud from the owner of the business.
While there is no magic answer to prevent employee theft, a business owner should consider reviewing all policies and procedures and internal control systems. Identifying areas of weakness can help a business monitor its financial information more effectively. Also, a business owner should consider routinely adding something new to oversight processes. As discussed above, employees who commit theft understand the business systems. Adding a new level of oversight or reviewing data not typically reviewed makes it more difficult for an employee to target weaknesses in the systems. Finally, although this seems fairly straightforward, a business owner should independently review the bank statement, including canceled checks, as these checks often contain information that would identify suspicious transactions.
Colleen S. Vallen is a partner in Citrin Cooperman Philadelphia’s valuation and forensic services group. An expert in the field of forensic and investigative accounting, she focuses her attention on forensic and fraud investigations, the preparation of financial damage analysis and litigation support. She is also highly experienced in the analysis, investigation and review of financial documents, as well as case planning and management, financial and economic analysis, expert report preparation, oral presentation of findings and assistance with discovery, interrogatories and depositions. She can be reached at email@example.com or 215-545-4800.