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www.ctcpas.org
Size of the Problem
The examples above represent just a
few of the employee fraud cases that
have recently occurred. An online
search of the term "embezzlement" re-
sults in pages of further stories and
additional employee frauds remain
undetected. Individuals are stealing
at an alarming rate, and the subse-
quent losses range from hundreds of
thousands to millions of dollars. Over
the past 10 years, the frequency of
employee fraud has reached epidem-
ic levels, yet only a fraction of these
cases ever become public. Most are
quietly resolved for many reasons, but
primarily to avoid negative publicity.
Preventing, Detecting, Investigating
Many articles have addressed em-
ployee theft and embezzlement and
detailed the importance of identifying
risks and implementing better internal
controls. Most articles focus on cre-
ating awareness, segregating duties,
and preventing (as well as detecting)
instances of employee theft and em-
bezzlement. Some articles provide
checklists for self-assessment and im-
plementation, while others poll readers
on their fraud awareness levels. How-
ever, few articles address strategies for
recovering losses after a theft or em-
bezzlement.
Recovering Funds
In too many cases, by the time an or-
ganization discovers the theft or em-
bezzlement, the responsible individual
Recovering
Losses From
Employee
Theft and
Embezzlement
By Steve Pedneault, CPA/CFF, CFE,
Founder/Owner, Forensic Accounting
Services, Glastonbury; Member,
CTCPA Valuation, Forensic, and
Litigation Support Group
Padding Payroll
The CFO handled all financial aspects of a small company, with little independent
oversight at the transactional level. His responsibilities included all facets of
payroll; he utilized an outside payroll provider and reviewed charges on the
corporate credit cards.
Month after month, the CFO recorded transactions, reconciled financial activity,
and, on a quarterly basis, was the sole contact with the outside accountant,
facilitating financial reports for management and investors. During a recent
trip, the CEO needed to adjust an employee's compensation and reviewed the
company's payroll reports. Horrified, he noted the CFO's enormous year-to-date
compensation, along with extra paychecks paid to the CFO.
The preliminary results of a brief investigation identified nearly $1 million in
unauthorized manual checks paid to the CFO, as well as the CFO's personal
use of the company's credit card. The good news? The company had employee
theft insurance coverage to recoup the diverted funds. The bad news? Recovery
through the insurance policy was limited to $10,000.
Skimming Cash
After terminating the business manager, a physician and her staff were quite
busy covering their additional responsibilities within the practice. One afternoon,
after completing a scheduled visit, a returning patient asked the physician about
receiving her discount for paying in cash. Confused, the physician told the
patient that they didn't offer discounts for paying cash. The patient revealed that,
after prior appointments, the business manager always gave her a discount and
collected a cash payment. Stunned, the physician requested the deposit detail
images from her bank for the prior 12 months. She was sickened to learn there
had been no cash deposits within the last year.
The physician worked with her staff to review patient charts, past appointments,
and payment details, only to learn that the business manager, who had worked
at the practice for nearly 15 years, had been skimming cash payments received
from patients. After contacting a number of patients, she learned that many of
them had paid in cash, yet no cash deposits had been made into the practice's
bank account for the past five years.
A lengthy, costly investigation led to a minimum loss of $275,000. The good
news? The practice had theft coverage to recover the funds. The bad news?
Their recovery will be minimal due to the $25,000 policy limit.