“I’m not upset that you lied to me, I’m upset that from now on I can’t believe you” – Friedrich Nietzsche
Although trust is a significant factor when maintaining good relationships with your employees, it can be misplaced or abused. In fact, statistics reveal that acts of embezzlement and theft are frequently committed by trusted employees.
We recently provided valuation services to a business owner who implicitly trusted his controller. The owner failed to implement strong internal procedures and, as a result, the controller was given far too much control over the operations of the company. Over an extensive period of time, the controller stole enormous amounts of money to purchase expensive electronics, jewelry, furniture, cars, motorcycles, and other types of lavish merchandise for his personal use. He also used corporate funds to pay off personal debts. The controller was easily able to cover up the fraudulent acts because he was vested with unlimited and unquestioned authority and no checks and balances existed within the company.
When the business owner finally found out about the embezzlement, he was shocked. He really considered the controller to be part of the family. He and his wife often socialized with the controller inviting him to their home for kid’s birthday parties, celebrations and other family events. They even traveled with the controller and his wife. After the investigation was complete, the controller had taken more than $1 million dollars from the company over a period of about four years.
Creating and maintaining an ethical culture in which no one is exempt from the rules is the most effective way to avoid embezzlement and theft. The business owner should have implemented procedures to segregate internal accounting/bookkeeping responsibilities. Three such duties are authorization, recording, and custody. In the case mentioned above, the controller had too much of all three. The controller was able to authorize payments to pay off company debts as well as his personal debts. The controller was able to record the payments as business expenses and cover up his tracks. Finally, he also had custody because he was able to autonomously obtain cash from the business for his extravagant shopping sprees. As a lesson to business owners, prevent any single person from being able to perform more than one of the three duties mentioned above and remember that a breakdown in internal control of a company’s assets can enable a dishonest employee to manipulate the system for self-serving purposes.
By Henry & Horne