AICC 2017 ANNUALMEETING PRESENTED BY MITCHELL E. KLINGHER CPA PROTECTING YOUR COMPANY FROM EMPLOYEE THEFT

Transcription

1 AICC 2017 ANNUALMEETING PRESENTED BY MITCHELL E. KLINGHER CPA PROTECTING YOUR COMPANY FROM EMPLOYEE THEFT

2 WHY DO THEY DO IT??????

3 THE PSYCHOLOGY OF THEFT Vicarious thrill It doesn t matter Everyone does it Feeling deprived Lack of Respect

4 The thief convinces himself that he has a right to the object he desires. He needs it more than the other does. It is rightfully his. I AM ENTITLED According to the research, the dynamic that influences people to shift their moral standards is the feeling of being financially deprived. Somehow we seem to have an infinite capacity to rationalize behavior when we feel deprived this can cause a person to justify a new set of moral standards, People can also feel financially deprived when they still have plenty of resources, especially if there has been a recent change in circumstance

5 MY PERSONAL EXPERIENCES Controller paying the same bill from multiple companies Plant employee signing for half loads of pallets Plant manager approving payroll for non-existent employees Accounts payable clerk creating fictitious vendors Controller padding payrolls this happens a lot Bookkeeper forging petty cash checks and removing them from bank statement Waste sales remitted to personal account of an owner Office manager ordering 2 years worth of supplies to obtain free merchandise

6 HOW CAN YOU PREVENT IT???

7 THE MOST IMPORTANT THINGS BACKGROUND CHECKS KNOW YOUR EMPLOYEES MAKE SURE THEY KNOW YOU ARE PAYING ATTENTION

8 PRE-EMPLOYMENT PROCESS Standard application approved by counsel Clearly stated somewhere on the application should be your policy regarding a candidate providing false, incomplete, or misleading information, or omitting information that would identify a problem Standard document request Resume, letters of reference, military records, copies of diplomas or degrees, copies of transcripts depending on the position or situation Somewhere on the application form itself or in a separate document You seek the candidate s permission to perform a credit check

9 PRE- EMPLOYMENT PROCESS VERIFY PERSONAL INFORMATION PAST EMPLOYMENT EDUCATION REFERENCES CRIMINAL AND CIVIL HISTORY CHECKS CREDIT CHECK

10 EMPLOYEE COMMUNICATIONS Consider Communicate Establish and explain Consider establishing and communicating to employees a means to discuss personal financial issues with you. Communicate to employees their fiduciary responsibilities as employees, including their duty to report suspected activity to you. Establish and explain to employees a means for them to communicate information regarding suspected activity of fellow employees

11 SEGREGATION OF DUTIES ROTATING FUNCTIONS KEY DETERRENTS RUN A TIGHT SHIP! MANDATORY VACATIONS CONSISTENT ADHERENCE TO POLICIES AND PROCEDURES OUTSIDE CHECKS AND VERIFICATION SURPRISE CHECKS CONSISTENT REVIEW OF POSSIBLE PROBLEM AREAS

12 HOW DO YOU SPOT IT???

13 EMPLOYEE BEHAVIOR TO LOOK FOR Watch for unusual employee behavior or changes in employee personality, attitude, or behavior Monitor employees lifestyles and watch for any noticeable changes or activity inconsistent with their lifestyle Monitor for other common signs of a potential problem. Ensure employees take vacations and time off and that someone else is doing their job while they are away Consider rearranging job responsibilities, create crosstraining opportunities, and have employees cover other employees areas of responsibilities on a regular basis

14 Determine If any signs become apparent, determine the employee s areas of responsibility, and opportunities. POTENTIAL RESPONSES TO TROUBLESOME SIGNS Increase Consider Increase your level of scrutiny in the areas identified, looking for any signs that an area of opportunity has been exploited. Consider implementing additional controls or reassigning/rearranging responsibilities, even temporarily, to address your concerns. Consider Consider consulting with your outside accountant or someone experienced in these matters to quietly look further into the employee s responsibilities and areas of opportunity

15 INDICATORS OF POSSIBLE THEFT Customer accounts receivable growing larger and older Unexplained drop in cash flows (especially with increases in sales and volume) Unexplained rise in unpaid vendors Missing documents or sloppy record keeping Accounts out of balance or unreconciled Unexplained differences in reconciliations of balances Unauthorized access to computer files

16 PREDICTIVE INDICATORS BUDGET TO ACTUAL ANALYSIS JOB COST VARIANCES UNEXPLAINED CHANGES IN WASTE

17 HOW DO THEY DO IT???

18 Paying for goods that you don t receive Kick-back schemes for directing purchases. HOW DO THEY STEAL Raising the amounts of checks, invoices and vouchers after they have been officially approved. Issuing and cashing checks for returned purchases not actually returned. Pocketing the proceeds of cash sales and not recording the transactions. Lapping (i.e., pocketing small amounts from incoming payments and applying subsequent remittances on other items to cover the shortages). Forging checks and destroying them when returned by the bank, then concealing the transactions by forcing footings in the cash books or by raising the amounts of legitimate checks.

19 Charging Charging customers more than the invoice shows and pocketing the difference. HOW DO THEY STEAL Padding Failing Padding payrolls as to rates, time, production or number of employees. Failing to record returned purchases, allowances and discounts and appropriating equivalent amounts of cash. Paying Paying creditors invoices twice and appropriating the second check. Appropriatin g Appropriating checks made payable to cash or bank, supposedly for creditors accounts, payment of notes or other expenses. Misappropria ting Misappropriating cash and charging the amounts taken to fictitious customer accounts

20 LET S GET MORE SPECIFIC

21 Klingher Nadler LLP SHRINKAGE SQUARE FOOTAGE IN INVENTORY PLUS FOOTAGE PURCHASED LESS FOOTAGE IN ENDING INVENTORY EQUALS FOOTAGE MANUFACTURED FOOTAGE MANUFACTURED LESS FOOTAGE SHIPPED DIVIDED BY FOOTAGE MANUFACTURED EQUALS SHRINKAGE PERCENTAGE

22 Klingher Nadler LLP 22 SHRINKAGE CALCULATION ABC SHEET PLANT SHRINKAGE CALCULATION MAY 2015 MSF INVOICED TO CUSTOMERS TOTAL MSF FROM VENDOR INVOICES 15,876 LESS MSF CHARGED BACK: OVERRUNS (185) UNDERRUNS (220) BAD SHEETS (315) (720) ADD MSF RECEIVED FROM FARM OUTS 1,026 ADD MSF IN OPENING INVENTORY 29,875 LESS MSF IN ENDING INVENTORY (32,716) 13,341 UNACCOUNTED FOR MSF (SHRINK) 656 SHRINK % 4.69%

23 NOT GETTING PAID FOR YOUR PRODUCTS Have an owner or designated individual should be responsible for accepting new customers and assigning initial credit limits. System controls should prevent unauthorized employees from entering new customers or making changes to existing customers. individuals responsible for shipping product should be independent and separate from individuals responsible for recording sales and processing invoices to customers. A procedure should be implemented to match shipping information with customer invoicing on a regular basis to ensure that every shipment to a customer is supported by a sales invoice posted within the system.

24 Severely limit who can add new vendors to your system Conduct background checks and other due diligence on all new vendors PAYING FOR GOODS THAT YOU DON T RECEIVE Use your purchase order system severely limit and scrutinize all payments that are outside the P.O. System Count sheets on the way in Consistent shrinkage calculations Take regular inventories and investigate differences Lock down who can initiate purchases at all levels Did I mention rotate the receiving function VIDEO SURVAILANCE OF SHIPPING AND RECEIVING

25 STEALING THROUGH CASH DISBURSEMENTS All checks should be computer generated No checks payable to cash Petty cash accounts aren t necessarily petty they need the same rules A human being should sign every check eliminate check signing machines Have a dollar threshold that requires 2 signatures Know your vendors beware of misspelling or odd amounts for transactions Watch for odd check numbers Totally lock down who can authorize electronic payments and severely limit their use Double ditto with respect to wire transfers Require daily bank reconciliations

26 MISAPPROPRIATION OF CUSTOMER REMITTANCES USE A LOCK-BOX HAVE CUSTOMERS REMIT ELECTRONICALLY CONTROL PROCEDURES FOR MAIL IMPORTANT NEED FOR SEGREGATION OF DUTIES OPENING MAIL AND MAKING CONTROL LISTING OF DEPOSITDS POSTING BOOKS AND RECOREDS RECONCILING ACCOUNTS REVIEW EVERY CUSTOMER CREDIT THAT DOESN T COME FROM CASH RECEIPTS

27 STEALING THROUGH PAYROLL Consider automating your time tracking to a system that is integrated to your payroll system Make sure there is an extra signoff required for adding new employees and for every pay rate change and have preapproved forms that are used with appropriate sign off s Require that payroll packages be received unopened by the owner of the business. Have other managers hand out the checks on a periodic basis Automatic transfers are convenient, but may leave you vulnerable Get involved Require that payroll registers and reports for each pay period be generated and provided to the owner for independent review. Review the final payroll registers and reports for each pay period for reasonableness. Look for employees with PO boxes for their addresses, for pay stubs with no withholding and for any odd adjustments to the net check

28 ISSUES WITH CREDIT AND DEBIT CARDS Back up Specify Use Review Do not allow Lead by Original receipts must back up each purchase Specify the consequences associated with not following the rules Use one accounts with cards for each authorized individual Review the activity monthly don t let them slide and put together months at a time Do not allow debit cards Lead by example.

29 INSURANCE PROTECTION Usually part of the business commercial package Fidelity Bond s are usually reserved for fiduciary situations such as pension plans Make sure that your policy includes coverage for employee dishonesty Assess the adequacy of coverage - cost benefit Make sure that you understand your responsibilities to report and cooperate under the terms of the policy Current increases in limits will not help your for a scheme that started in a previous year

30 KEY TAKEAWAYS FORMAL CONSISTENT PRE- EMPLOYMENT PROCESSES KNOW YOUR PEOPLE MAKE SURE THAT LINES OF COMMUNICATION ARE OPEN AND STRONG LOCK DOWN COMPUTER ACCESS FORMAL POLICIES PROCEDURES SEGREGATION OF KEY FUNCTIONS RUN A TIGHT SHIP MAKE SURE THE RULES APPLY TO EVERYONE