Preventing and Detecting Employee Theft and Embezzlement

STEPHEN PEDNEAULT, CPA/CFF, CFE, is the founder and Principal of Forensic Accounting Services, LLC, a CPA firm specializing in forensic accounting, employee fraud, and litigation support matters. Steve is the author of Fraud 101: Techniques and Strategies for Understanding Fraud and Anatomy of a Fraud Investigation, and a contributor to Fraud Casebook: Lessons from the Bad Side of Business, all published by Wiley. Steve has also written numerous articles appearing in local and national media, and is a frequent speaker on the subjects of employee embezzlement and forensic accounting. For more information about Stephen Pedneault, go to www.forensicaccountingservices.com.

• Preface xiiiAcknowledgments xviiIntroduction xixCHAPTER 1 Hiring the Right Employees 1Disclaimer 1Where Do You Start? 1Advice of Counsel 3Application Policy 3Due Diligence 5Personal Information 7Past Employment 8Education 9References 11Criminal and Civil History Checks 11Credit Checks 13Hiring Time 14Hiring the Right Employees: Considerations 17CHAPTER 2 Know Your Employees 19Why Is Knowing Your Employees Important? 24Open Communications 25What Should You Watch for in Your Employees? 26Know Your Employees: Considerations 29CHAPTER 3 Sales, Cash Receipts, and Collections 31Here’s Where Everything Starts 31Recording and Tracking Sales 32Collections 44Debit Memos and Other Adjustments 48Accounts Receivable 52Sales, Cash Receipts, and Collections: Considerations 54CHAPTER 4 Credit Card Sales, Transactions, and Merchant Statements 59Processing Sales 59Reconciling Sales 61Processing Refunds or Credits 61Reviewing and Reconciling Refunds or Credits 63Reviewing and Reconciling the Merchant Statement 67Credit Card Sales, Transactions, and Merchant Statements: Considerations 69CHAPTER 5 Purchases, Cash Disbursements, Checks, and Petty Cash 71Purchases 75Cash Disbursements/Checks 80Unpaid Bills/Accounts Payable 84Petty Cash 86Purchases, Cash Disbursements, Checks, and Petty Cash: Considerations 88CHAPTER 6 Credit Cards and Debit Cards 91Credit Cards 94Debit Cards 96Credit Cards and Debit Cards: Considerations 99CHAPTER 7 Employee Expense Reimbursement 103Expense Submission 104Where Are the Abuses? 106Payment Processing 109Employee Expense Reimbursement: Considerations 111CHAPTER 8 Electronic Banking 115Traditional Banking (In-Person Deposits and Manual Check Writing) 115Check Processing and Clearing Changes 117Changes in Bank Deposits 120ATMs 121Online Banking 122What Can You Do? 123Electronic Banking: Considerations 132CHAPTER 9 Payroll Processing 137Payroll Administration: Adding/Changing/Terminating 138Payroll Processing 142Payroll Tax Returns 149Payroll Processing: Considerations 151CHAPTER 10 Inventory Issues and Controls 153Prevention: Good News and Bad News 153Retail Businesses: Items Available for Sale 153All Businesses: Items for Use by Employees (Supplies, Tools, and Equipment) 166Detection 166Inventory Issues and Controls: Considerations 169CHAPTER 11 Bank Statements, Canceled Checks, and Reconciliations 173Bank Statements 177Investment Account Statements 178Canceled Checks 178Bank Reconciliations 181Bank Statements, Canceled Checks, and Reconciliations: Considerations 187CHAPTER 12 Financial Reports 189Generate Financial Reports Regularly 190Why Is the Regular Review of Financial Reports So Important? 195When to Consider Outside Advice and Assistance 196Financial Reports: Considerations 202CHAPTER 13 Safeguarding Your Bookkeeping or Accounting Systems 205Manual Bookkeeping Systems 206Computerized Bookkeeping and Accounting Systems 209QuickBooks Users 222Safeguarding Your Bookkeeping or Accounting Systems: Considerations 224CHAPTER 14 Prevention, Detection, and Insurance 227Timing Is Everything 229Adequacy of Coverage 230Responsibilities for a Claim 230Disclaimer 235Prevention, Detection, and Insurance: Considerations 236CHAPTER 15 Your Response to an Identified or Potential Issue 239A Dreaded Day of Discovery 239Due Diligence on the Discovery 243What If It Appears to Be Fraud? 246Your Response to an Identified or Potential Issue: Considerations 249Appendix A: Embezzlement Controls for Business Enterprises 253Appendix B: Who Was Lester Amos Pratt? 291About the Author 295Index 297