How Much Cash Have Your Employees Stolen From You?

In recent years, the number of employee theft cases we have been involved in has been alarmingly high. Not only has the number of embezzlement cases been increasing, but the actual dollars involved per case have increased even more substantially. As you read this, you might think, “This could NEVER happen to me.” It’s common for business owners to believe that such a situation could never happen to them, but the impact that an embezzlement case can have on a company when it does happen can be catastrophic.

Some businesses can’t overcome the financial loss from a “trusted” employee and might not even realize that their insurance coverage for employee dishonesty is inadequate or non-existent. Moreover, in the most recent cases we have been involved in, the real cost has been the immense emotional toll on the business owners. Feelings of embarrassment, shame and guilt for allowing something like this to happen and go undetected are something many owners struggle with.

We have consistently observed a common issue in all the cases we’ve handled: a significant lack of controls in the cash and monitoring process. Every time we meet with a business owner, it becomes evident within the first few minutes that inadequate controls are in place, which could have, at a minimum, reduced the amount of cash embezzled. In some cases, these controls may have even stopped it outright. One of the key recommendations we make to our clients is to conduct a “systems” review every few years. This review can be customized to address the specific concerns of the owners and identify ways to prevent employee embezzlement. While there is a cost involved in having a CPA firm perform a systems check, it provides the owners with assurance that experienced professionals have examined areas within the accounting department to help protect the company’s assets.

In addition, here are a few steps ALL business owners should consider putting in place at a minimum to help curb employee embezzlement:

1. Segregation of Duties

• • Description: Divide responsibilities among different employees to ensure no single person has control over all aspects of a cash transaction.
  • Implementation: Assign separate individuals to handle cash collection, recording and reconciliation. For example, one person collects the cash, another records the transaction and a third reconciles the cash drawer.

2. Dual Authorization

• • Description: Require two individuals to authorize significant cash transactions.
  • Implementation: Ensure that two authorized signatures are needed for large cash disbursements or withdrawals. This reduces the risk of unauthorized transactions.

3. Regular Reconciliation

• • Description: Frequently reconcile cash records with actual cash on hand.
  • Implementation: Perform daily or weekly reconciliations of cash drawers and bank deposits. Discrepancies should be investigated immediately to identify potential fraud.

4. Surveillance and Monitoring

• • Description: Use technology to monitor cash handling areas.
  • Implementation: Install surveillance cameras in areas where cash is handled, such as cash registers and safes. Review the footage regularly to detect suspicious activities.

5. Use of Cash Registers and Point-of-Sale (POS) Systems

• • Description: Implement cash registers or POS systems to track cash transactions accurately.
  • Implementation: Ensure all cash transactions are processed through a POS system that records the sale and generates a receipt. This creates an audit trail and helps prevent cash skimming.

Robust Systems to Prevent Cash Fraud

1. Automated Cash Handling Systems

• • Description: Use automated systems to handle and count cash, reducing human error and opportunities for theft.
  • Implementation: Invest in cash recyclers or automated teller machines (ATMs) for cash deposits and withdrawals. These systems count cash accurately and securely store it.

2. Employee Training and Awareness Programs

• • Description: Educate employees about cash handling procedures and the importance of fraud prevention.
  • Implementation: Conduct regular training sessions on proper cash handling techniques, fraud indicators, and reporting procedures. Encourage a culture of transparency and vigilance.

3. Internal Audits

• • Description: Conduct regular internal audits to review cash handling processes and detect irregularities.
  • Implementation: Schedule unannounced audits to review cash transactions, reconciliations, and storage procedures. Audits should be conducted by an independent team to ensure objectivity.

4. Advanced Security Features

• • Description: Implement advanced security measures to protect cash and deter fraud.
  • Implementation: Store cash in secure safes with time-lock mechanisms. Implement access controls, such as biometric authentication, to restrict access to cash handling areas.

5. External Audits and Reviews

• • Description: Engage external auditors to review cash handling practices and provide an objective assessment.
  • Implementation: Schedule annual or bi-annual audits by external auditors to evaluate the effectiveness of internal controls and identify areas for improvement.

Preventing cash fraud requires a combination of well-designed controls and robust systems. By implementing segregation of duties, dual authorization, regular reconciliations, surveillance and automated cash handling systems, businesses can significantly reduce the risk of cash fraud. Regular employee training, internal and external audits and advanced security features further enhance fraud prevention efforts. Through these measures, businesses can protect their financial assets, maintain their reputation and foster a culture of integrity and accountability.

Contributing Author: Sean T. Daughton, CPA, CFE, is an audit partner with over 28 years of experience specializing in forensic accounting and consulting services. He provides audit and advisory services to a variety of clients, including automotive dealers, manufacturers and retail corporations. For more information on this topic, you may contact Sean at sdaughton@dmcpas.com or (315) 472-9127.