Company leaders must learn how to stymie embezzlement

PORTLAND, OREGON
BUSINESS NEWS FROM THE FOUR-COUNTY REGION
JUNE 11, 2010
GUEST COLUMN
Company leaders must learn how to stymie embezzlement
by Peter Kwong and Scott Shorr
Many local small businesses and other
organizations have recently been hit with
embezzlement fraud by employees and
fiduciaries.
Commonly stated reasons why these
incidents continue to happen include: it
costs too much to have more than one person do all the work, the employer trusted
an employee known for years, or that the
employee was highly recommended by
references.
From a financial-controls and accounting perspective, executives and principals
need to understand the risks they face if
one person handles all financial responsibilities or has complete access.
For example, a person who has access
to invoicing and cash collections could alter an invoice to a customer or donor and
pocket the difference between what was
paid or contributed versus what should
have been billed originally. Segregating
duties such as customer/donor setup, invoicing, collecting and depositing cash
receipts is critical to preventing access by
one person.
Company leaders also need a good understanding of their cash inflows and outflows as well as the timing of those events.
They also should regularly review financial reports to insure that their money is
not walking out the back door. Also, ac-
tively reviewing the details supporting the
information and asking questions is critical to good governance over a financial
function.
From a legal perspective, there are other
ways to protect your organization. Companies and other organizations may buy
insurance to protect against employee
embezzlement and theft. If your company
is the victim of employee embezzlement
and is underinsured or not insured at all,
it should consider potential civil claims,
as any criminal prosecution would be primarily to protect society and not to seek
civil restitution for the victim.
Unfortunately, many employees or volunteers who commit theft are not likely to
have the resources to pay back the stolen
money. It is common for those who embezzle to have underlying problems such
as gambling addictions, drug or alcohol
addictions, or substantial debts. These
same problems make it very unlikely the
company will recover all, or perhaps any,
of its losses from the now former employee or volunteer who has spent all of
the money. Therefore, additional potential
claims must be considered.
In many circumstances, an employee
either forges a check signature or signs
a check for the company without actual
authority. Under Oregon and most states’
laws, a company is not liable for a check
that was signed by someone not authorized
to sign it. In this case, the bank may have
liability for improperly paying a fraudulently signed or unauthorized check. Still,
under that same law, the banks have a number of defenses that may limit the potential
recovery. The bank also may have defenses
that limit the time period for recovery or
attempt to shift responsibility back to the
victim company if it failed to sufficiently
supervise the embezzling employee.
In any case, the best way to avoid the
costly process of civil litigation is to have
adequate financial controls that are regularly followed. Of course, the majority of
employees do not commit fraud or embezzle, but an organization cannot rely solely
on the belief it has hired good people. If
the company relies on such a belief, it risks
significant losses and costly litigation that
may not return all of its losses.
Scott Shorr is a shareholder
of law firm Stoll Berne, handling a variety of complex business, securities and consumer
class action litigation. He can
be reached at 503-227-1600 or
at www.stollberne.com
Peter Kwong, a shareholder at Perkins & Co
accounting firm, manages the Risk Management
Practice Group. He can be reached at 503-2210336 or at www.perkinsaccounting.com.
Reprinted with permission from the Portland Business Journal. ©2010, all rights reserved. Reprinted by Scoop ReprintSource 1-800-767-3263.