Case Studies

The long-term trusted manager of a small company hired three of her sisters to work there, as an accountant, accounts receivable clerk and a clerical position. All financial transactions and mail went through one of the three sisters. Can you guess what happened next? When the company installed a new computer system and changed its processes to incorporate more accountability, all the sisters left. Much of the audit trail, if one ever existed, disappeared with the sisters. There was evidence of about $40,000 in losses and an undetermined amount in lost revenue due to work that was never billed.

LESSONS:

• It’s never wise to have family members or close friends in a direct reporting relationship. If you do, for example in a family business, you should heavily promote accountability and transparency and develop procedures accordingly.

• Forensic accountants typically find about half to two-thirds of the losses in an embezzlement case. So when you read about a fraud case in a newspaper, increase reported losses by 50% to 100% to get the total loss to the company. Insurance companies—if the company has employee dishonesty coverage—will pay only on the losses that can be substantiated. Most embezzlers spend the money or use it to fuel an addiction (drugs, gambling, shopping, etc) so it is rare that a company can recover the total amount stolen.