According to CPA Canada, the most common form of employee fraud involves the misappropriation of assets. This type of fraud is can be described in different ways, including theft, larceny, embezzlement and defalcation. Although there are slight variations for each, the overarching principle is that an employee or other trusted person misappropriates monies or other company assets to which they are not entitled. These schemes generally fall into one of the two broader categories listed below:

  • Misappropriation of money
  • Misappropriation of non-cash assets

Employee theft and embezzlement schemes can often involve payroll fraud, expense report fraud, insurance and benefits fraud, procurement and billing fraud, or financial reporting fraud.

However, as shown below, there are many other forms of employee theft and embezzlement that fall outside of the parameters of the aforementioned five categories.

laptop-figure

THEFT OF MONEY

There are a multitude of ways in which a deceitful employee can extract funds from the organization which employs him or her. Specific forms of occupational fraud will have a higher risk of occurrence. The scope of employee fraud schemes that involve the misappropriation of funds are dependent upon the position, role and responsibilities of the employee involved in addition to the size and character of the organization. Examples of employee theft and embezzlement include:

  • Stealing cash from a cash register;
  • Illicit financial benefit by under-reporting and ‘skimming’ sales before they are entered into the accounting system;
  • Writing cheques, sending wires or making funds transfers to themselves;
  • Forging or altering signatures;
  • Stealing money by writing cheques payable to ‘cash’ or payable to the bank;
  • Approving payments to phony vendors that the employee, family member or friend created.

RED FLAGS:

  • An employee appears to be living beyond his or her means
  • The behaviour and routine of an employee drastically changes
  • An employee rarely – if ever – indulges in pleasurable activities, such as taking vacations
  • An employee insists on performing certain tasks alone by refusing to delegate tasks as may be expected
  • Invoices for certain vendors are always approved by the same employee

THEFT OF NON-CASH

THEFT OF NON-CASH ASSETS

Employees can also steal from their employers without taking any money by:

  • Taking or misappropriating inventory or equipment;
  • Using company vehicles or equipment when unauthorized, for their own personal use;
  • Using customer accounts, or lifting client lists for the intended benefit of an employee’s personal business, or for that of a new or prospective employer; and
  • Misappropriating intellectual property or other intangible assets

Red Flags:

  • Lack of segregation of duties in certain business functions
  • Disgruntled employees
  • Employees that own a personal businesses in the same, or in a similar industry
  • A culture that condones, tolerates and acquiesces when industry rules and regulations are not complied with under normal business practices

Identifying Potentially

Identifying Potentially Hidden Assets

Identifying hidden assets in a matrimonial dispute can challenging in the best of circumstances. Most people that hide assets from their spouses tend to do things ‘behind the scenes’ and in plain view of the other spouse.

There are several red flags or potential indicators which would suggest that a spouse may not be disclosing all of his or her assets includes:

  • Deposits in bank/investment accounts from unknown sources
  • Payments to credit cards/lines of credit that cannot be traced to any known bank accounts
  • Purchases of large assets whereby the source of funds is believed to be cash or cannot be traced to any known or disclosed accounts
  • Individuals who carry their financial affairs in overly complex financial structures, particularly in industries where such complex structures are not the norm

The leadership group at a mid-sized consumer goods company were reluctant to believe the robust allegations regarding their trusted and long-standing Accounts Payable manager. She had been employed by the company for fifteen years. She had begun as a bookkeeper, and worked her way up to become an Accounts Payable supervisor before being promoted to her current role. She epitomized the loyal and trusted servant. She rarely took time off, was punctual, reliable, detail-oriented, and was respected by her colleagues.

Recently, however, rumours about her had started to circulate. At first, management disregarded these allegations, but in time, found them increasingly hard to ignore. Some had heard that she felt as though she was underpaid, and that she was envious of other people in the company who had been promoted to more prominent and distinguished roles. Others suggested that she had been spending a lot of time at a local casino. However, when a whistleblower tip came across the desk of the CFO, it was decided that the company needed the assistance of forensic accounting professionals.

The anonymous whistleblower alleged that the Accounts Payable manager had approved wire payments to an unknown consulting company. The mailing address of this consultant seemed to be a mailbox located in a run-down strip mall which was located near the home of the Account Payable manager. Immediately after being retained, the forensic accountants started to probe deeper, quickly realizing that the consulting company in question was established by the husband of the Accounts Payable manager. After reviewing the company’s documents (bank statements, invoices, general ledgers and emails), conducting a public records search and discreetly meeting with various employees and the Accounts Payable manager, the investigators were able to conclude that the Accounts Payable Manager and her husband had falsified invoices for phony consulting services which were addressed to the her employer. At this point, she would approve and issue payments for these invoices to the consulting company.

Moreover, the forensic accountants realized that this scheme involved two additional companies that the couple had set up for the same purpose, and not merely the consulting company named in the whistleblower complaint. They also found that in addition to the fictitious billing scheme, the Accounts Payable manager had made a succession of cash withdrawals from her employer’s account over the previous two years. These transactions had not been scrutinized or flagged by the company. The magnitude and duration of the scheme far exceeded initial expectations. A total of $351,000 had been misappropriated by the couple over the course of two years. The forensic accountant formalized their findings in an investigative report and an affidavit, which were used by the victim organization to successfully pursue a civil claim against the Accounts Payable manager, her husband and their companies.

  • A thorough review of his financial statements, tax returns, notices of assessment and reassessment;
  • An examination of the signed contracts and agreements with general contractors;
  • Analyzing his banking records, such as bank statements, deposit slips and cancelled cheques;
  • Verifying his income with customers, particularly sizeable contracts;
  • Reconciling the building permits obtained by Jeremy on behalf of his clients with the projects that were thought to be undertaken;
  • Interviewing the external accountant and reviewing the relevant working papers;
  • Obtaining access to Jeremy’s computer and conducting forensic analysis of that device.

Relevant Evidence:

  • Bank statements
  • Banking records
  • Vendor invoices
  • Internal company general ledgers and other accounting records
  • Emails and other communication records
  • Public records, such as corporate filings and real estate records)
  • Interviews

To determine whether your organization may be susceptible to fraud , take the following brief survey: