Internal Fraud – Are You Vulnerable?

Today, it is rare to pick up a newspaper, or turn on the TV or radio without finding some type of report on consumer fraud. However, in reality – the retailer is more often the victim of these crimes than the consumer.

Frauds against retailers can vary wildly, from fraudulent returns by shoplifters, credit card data theft by computer savvy outsiders, or from internal schemes carried out by trusted employees.

The primary focus of this article is on internal fraud and embezzlement and little gets the internal theft message out better than Hayes International’s latest retail theft survey reporting that one in every 36 employees is actually caught stealing.

Now here’s just one story of those numerous ones that are appearing almost weekly in the national media:
On July 3, 2012, a retail operation’s Accounts Payable supervisor pled guilty to embezzling more than $1 million from her employer to feed a gambling habit. It was reported that one of this supervisor’s duties was to authorize payments to the company’s vendors. Apparently due to the lack of adequate internal controls, this supervisor spent nearly four years sending a total of 489 fraudulent checks to her home. As part of her scheme, she listed her daughter as a vendor and authorized payments to her. The bogus businesses shared the same address, the supervisor’s residence. When the checks arrived, the alleged fraudster forged her daughter’s signature and cashed each of them. (The prosecutor told the judge that the supervisor’s daughter did not know of the scheme and saw none of the money.) The scam ended in May when an employee suspected her supervisor of wrongdoing. The company performed an audit and contacted federal officials.

The amount the supervisor admitted embezzling was $1,046,152.79. This wasn’t this employee’s first brush with money troubles or the law. In 2002, when she worked in a “big box” retailer’s accounting department, she filed for Chapter 7 bankruptcy, listing liabilities of more than $86,500 and assets of $11,230. Among her debts: $41,000 owed on 18 credit cards.

Twelve years earlier, this same individual pleaded guilty in a County District Court to a misdemeanor count of aggravated theft-by-swindle involving $17,199. Court records showed she was placed on five years’ probation, received a stay of imposition and completed her probation in March 1995.

As exhibited by the above case, it is common for several years to elapse between the time the initial criminal act took place and the day of the scheme’s discovery, and more often than not—these cases are exposed strictly by accident or from information provided by a tipster, and not through the actions of an auditor, investigator, or accountant.

Prevention is Key
It is a well known “secret” that the solution to successfully preventing internal fraud and embezzlement is to get management involved. That’s right! No matter how trustworthy you perceive your staff—there is always the possibility of embezzlement in your operation. You can reduce your risk:
1) Recognize the Threat: Those in charge must recognize that internal fraud or embezzlement is a possibility.
2) Job Applicant Process: Controlling fraud and embezzlement starts at the initial hiring point. The risk can be reduced by conducting a thorough background and credit history check on those being appointed to critical-risk positions.
3) Multiple Tasking: One of the most effective measures to prevent acts of internal fraud or embezzlement is to not allow a single employee to be able to affect every stage of a critical work process.
4) Supervisory Oversight: Proper supervision is necessary to ensure that adequate internal controls are in place and enforced. Irregular and frequent spot-checks send a strong message of alertness and increase the chance of detecting fraud or embezzlement within your operation. $