PORTLAND, OREGON BUSINESS NEWS FROM THE FOUR-COUNTY REGION JUNE 11, 2010 GUEST COLUMN Company leaders must learn how to stymie embezzlement by Peter Kwong and Scott Shorr Many local small businesses and other organizations have recently been hit with embezzlement fraud by employees and fiduciaries. Commonly stated reasons why these incidents continue to happen include: it costs too much to have more than one person do all the work, the employer trusted an employee known for years, or that the employee was highly recommended by references. From a financial-controls and accounting perspective, executives and principals need to understand the risks they face if one person handles all financial responsibilities or has complete access. For example, a person who has access to invoicing and cash collections could alter an invoice to a customer or donor and pocket the difference between what was paid or contributed versus what should have been billed originally. Segregating duties such as customer/donor setup, invoicing, collecting and depositing cash receipts is critical to preventing access by one person. Company leaders also need a good understanding of their cash inflows and outflows as well as the timing of those events. They also should regularly review financial reports to insure that their money is not walking out the back door. Also, ac- tively reviewing the details supporting the information and asking questions is critical to good governance over a financial function. From a legal perspective, there are other ways to protect your organization. Companies and other organizations may buy insurance to protect against employee embezzlement and theft. If your company is the victim of employee embezzlement and is underinsured or not insured at all, it should consider potential civil claims, as any criminal prosecution would be primarily to protect society and not to seek civil restitution for the victim. Unfortunately, many employees or volunteers who commit theft are not likely to have the resources to pay back the stolen money. It is common for those who embezzle to have underlying problems such as gambling addictions, drug or alcohol addictions, or substantial debts. These same problems make it very unlikely the company will recover all, or perhaps any, of its losses from the now former employee or volunteer who has spent all of the money. Therefore, additional potential claims must be considered. In many circumstances, an employee either forges a check signature or signs a check for the company without actual authority. Under Oregon and most states’ laws, a company is not liable for a check that was signed by someone not authorized to sign it. In this case, the bank may have liability for improperly paying a fraudulently signed or unauthorized check. Still, under that same law, the banks have a number of defenses that may limit the potential recovery. The bank also may have defenses that limit the time period for recovery or attempt to shift responsibility back to the victim company if it failed to sufficiently supervise the embezzling employee. In any case, the best way to avoid the costly process of civil litigation is to have adequate financial controls that are regularly followed. Of course, the majority of employees do not commit fraud or embezzle, but an organization cannot rely solely on the belief it has hired good people. If the company relies on such a belief, it risks significant losses and costly litigation that may not return all of its losses. Scott Shorr is a shareholder of law firm Stoll Berne, handling a variety of complex business, securities and consumer class action litigation. He can be reached at 503-227-1600 or at www.stollberne.com Peter Kwong, a shareholder at Perkins & Co accounting firm, manages the Risk Management Practice Group. He can be reached at 503-2210336 or at www.perkinsaccounting.com. Reprinted with permission from the Portland Business Journal. ©2010, all rights reserved. Reprinted by Scoop ReprintSource 1-800-767-3263.