July 31, 2016

Experts: More controls can stop embezzlement

Robert Layman / Staff Photo

Attorney Mark Werle of Ryan Smith & Carbine, Ltd., reviews some statutes in the Rutland office's library Tuesday.

Vermont has seen an increasing number of embezzlement cases in recent years, including a recent case in which the former director of finance for Hunger Free Vermont pleaded guilty to embezzling $165,000 from the nonprofit group.

In that case, Sally H. Kirby, 61, of Essex Junction, pleaded guilty in U.S. District Court in Burlington earlier this year to a felony count of forging securities with the intent to deceive.

While there’s no silver bullet for this problem, there are measures local businesses and groups can take to prevent embezzlement.

Consistent oversight, strong internal controls and division of financial duties are key recommendations from experts.

Bret Hodgdon, a partner at Davis & Hodgdon Associates CPAs, in Williston, is a certified fraud examiner in Vermont. In his work, Hodgdon often finds a need for better financial controls and segregation of duties.

Some nonprofit clients, he said, are satisfied with just the executive director having check-signing authority. However, he encourages nonprofit boards to maintain oversight on the check stock as well, to guard against issues like signatures being forged.

“If you can control the check stock and you manage who has access (to it), then you can prevent the forgery as well,” Hodgdon said.

For small businesses and groups in Vermont, he added, splitting up duties can seem challenging, with few employees and tight budgets. However, adding an additional control can be as simple as getting a development person to open the mail and get images of checks coming in. This requires some cross-training, but not a huge amount.

“I think people overestimate what an internal control needs to be,” Hodgdon said.

Mark Werle, a partner with the law firm Ryan, Smith & Carbine, Ltd., in Rutland, said businesses that handle large amounts of cash should always have security cameras installed.

“Surveillance systems are so cheap now, and you have it just pointing right down at the cash register,” Werle said.

He recalled a case in New York state, where a bartender was caught in the act on camera. Werle said that when customers paid in cash, this individual, who had worked for the bar for a long time, was setting aside some of the cash and pocketing it later.

Also, for businesses that deal with a lot of cash, Werle said the cash receipts should be checked every week, and all the cash should be put through a checking account.

He added that all businesses should reconcile their checking accounts each month.

Fidelity insurance is also critical for each business to have, Werle said. He noted that many of the small business insurance packages will offer $20,000 to $40,000 worth of fidelity insurance, which covers a portion of losses in cases of embezzlement.

David Boyd, an associate with the law firm Gravel & Shea in Burlington, said it’s a good idea for businesses to review their assets and determine which ones are most vulnerable.

“Getting a handle on where your biggest concerns are is a good starting point,” he said.

Boyd also said business owners should “look out for red flags,” such as having trouble getting accounts to reconcile. Other warning signs include financial employees who aren’t willing to share those duties or don’t want to take vacation.

“If they’re not comfortable with anyone looking at their work, you should be concerned about that,” Boyd said.

A good safeguard can be having authorization limits requiring two signatures for checks above a certain amount, he added. He also said check stock should be locked.

“A lot of the embezzlements that we’ve seen recently have been smaller businesses or more leanly staffed places, where you don’t have the built-in organizational checks and balances,” Boyd said.

He also recommended that businesses provide an anonymous way for employees to report possible embezzlement, since other workers might notice these red flags before the owner does.

“There are some third-party hotline services that will sell you a package of services, from a 24-hour hotline to consulting for advice or controls,” Boyd said.

Chris Marquet, CEO of Marquet International, in Boston, is an international expert on embezzlement, who gave a public presentation on the subject at the University of Vermont last year.

He noted that nonprofit organizations are “frequent victims” of embezzlement, as they tend to have a small finance staff and little oversight.

For nonprofit groups and businesses, Marquet said, it’s important to split up the financial duties. He also emphasized that any business owner should look at their finances regularly, rather than simply believing the information employees give them, without checking it.

“That’s the failure of business controls and also one of oversight as well, where the business owner tends to take at face value what they’re told, rather than actually kicking the tires,” Marquet said.

Marquet also recommended that financial and accounting staff be required to take time off and vacation. He also recommended pre-employment background checks for all personnel with fiduciary duties, as well as periodic background checks on current employees, especially those in financial positions.

Jim Harrison, president of the Vermont Retail & Grocers Association, said “there’s no magic answer” when it comes to embezzlement. However, he said every business needs a system in place that includes reviewing entries in the bookkeeping system, monitoring cash flow and doing some unscheduled audits.

“It’s very common for retailers to monitor the cash receipts vs. the register receipts to look for patterns, to make sure things are in balance,” Harrison said.

He said businesses should take the “trust but verify” approach to their finances.

“We all want to think the best, and in most cases, that’s justified, but when you let your guard down and don’t watch things closely, you’re opening yourself up to wrongdoing,” Harrison said.

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