Embezzlement in the News
The Daily Record, January 7, 2010 by Gina Bliss
Rochester news this week included a story about an embezzlement at a small local bank. I have assumed that embezzlement is very difficult at a bank. After all, when I go to the bank I see security cameras everywhere I look! Banks probably have top-notch internal controls. A successful embezzlement would probably require collusion among employees or management overrides. That’s what I thought.
My preconceived notions were incorrect. In this case, it is alleged that a lone teller embezzled funds going back two years. The embezzlement was not discovered quickly. The teller allegedly covered her tracks by manipulating the accounting system, stealing from a cash delivery, and forging checks and withdrawal slips. She had access to all of that! Segregation of duties was evidently a problem. Internal controls were either not in place, or were easily overridden.
Banks do reconcile money meticulously. Each teller must balance each day. A document that shows a sum of money has been withdrawn is an invaluable tool for the embezzler. That’s why the teller faces charges of forgery as well as larceny. The forgery conceals the fact that money has been stolen and is gone.
I have to conclude that a small bank, like any other small business, has difficulty establishing and maintaining internal controls.
Internal control is the means by which an organization’s resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud. It protects the organization’s resources. An example of internal control would be separating the functions of custody, accounting, and reconciliation of cash. Computer passwords, security cameras, and reviews and approvals of transactions are other examples.
When the three elements of the fraud triangle exist simultaneously, a fraud can occur. The three elements are financial pressure, perceived opportunity, and rationalization.
In this economy where unemployment, repossessions, bankruptcies and mortgage defaults are all on the increase employers should assume that at least some of their employees are feeling financial pressure.
Employees have perceived opportunity if strong internal controls are not evident. That includes an ethical "tone at the top." Internal controls as a deterrent should not be underestimated. Potential fraudsters who think they will be caught rarely commit crimes.
Rationalization is simply a fraudster’s ability to convince him that what is wrong to do is actually right. Often, the fraudster convinces himself that he is borrowing money and will pay it back. He believes he doesn’t get paid enough, and so he deserves it. A fraudster thinks everybody does it. He has no choice. He will lose his house if he doesn’t take the money.
There are some common fraud "red flags":
Unusually high personal debts
Living beyond one’s means
Excessive gambling habits
Alcohol or drug problems
Feeling of being underpaid
Feeling of insufficient recognition for job performance
Consistent rationalization of poor performance
Wheeler-dealer attitude
Never out of balance, balancing perfectly all the time
Secretive, territorial
Not taking vacations of more than two or three days
No explicit or uniform personnel policies
Pay levels not commensurate with the level of responsibility assigned
Customer complaints
No segregation of duties between the accounting functions
A department that lacks competent personnel
A criminal record
Placing too much trust in key employees
This is an abbreviated list. For the complete list visit www.acfe.com.
Despite the security measures that banks put in place, banks are very tempting targets. Incidents of employee theft and embezzlement are fairly common. Fraud schemes continue to prosper in the banking industry in infinite variety limited only by the creativity of fraudsters. In many ways the electronic age has complicated implementing and maintaining internal controls. These crimes affect not just small banks, but also large sophisticated banks.
Executing a scheme to defraud a financial institution is bank fraud. The United States has a federal Bank Fraud Statute. The FBI assisted in the investigation we discussed earlier.
What did we learn from that investigation? Banks are vulnerable too. They need more internal controls than many businesses because cash is so susceptible to theft. We all need to consider the financial health of our employees and coworkers and watch for fraud red flags. All businesses need strong internal controls to deter fraud. Security cameras are not enough!
Gina Bliss, CPA, CFE
Gina is a senior manager at EFP Rotenberg who specializes in internal audit, fraud audit, and forensic accounting. Article reprinted courtesy of The Daily Record.