How easy is it to embezzle, even from law firms? Read more to find out!

An article by Dawn Taylor, CFE, published in the Association of Certified Fraud Examiners newsletter.

Beware of Crooks Keeping Small Business Books By Dawn Taylor, CFE

According to a recent Department of Justice press release, in January 2010, Norma Blackwell of Sebring, Florida, was sentenced in federal court to 17 months in prison, followed by three years of supervised release, for embezzling funds from a Virginia Beach law firm. In addition to serving time, Blackwell was ordered to pay $153,203.71 in restitution to the law firm. According to court records, while employed as the law firm's bookkeeper, Blackwell defrauded the firm of approximately $153,203.71 over more than three years. Blackwell's scheme consisted of manipulating the signing and issuance of firm checks to pay her family's creditors and other personal expenses, including cruises and trips to Disney World. To cover up her scheme, Blackwell made false accounting entries into the firm's books.

For a similar scheme, Theresa Canavan Lyda, of Fairhope, Alabama, was sentenced in federal court in January 2010 to 10 months in prison and ordered to pay restitution in the amount of $81,481.15 for embezzling funds from her employer, Paige and Pallette. In her position as bookkeeper, Lyda devised a scheme to defraud Paige and Pallette by using the company's checks and credit cards, along with direct debits from the company's bank account, to pay personal expenses. Lyda carried out her scheme for over two years, falsely altering accounting records in order to conceal her misdeeds.

The schemes by Blackwell and Lyda are two of countless bookkeeper frauds regularly featured in Department of Justice press releases. These unsavory bookkeepers commonly embezzle their client's or employer's company funds through the following means:

• Acquiring debit cards, credit cards, or lines of credit in the company name through illicit methods -- such as making false representations to financial institutions -- and then using the cards and credit lines without authorization
• Making withdrawals from a company account without consent -- especially via wire transfer, check, or cashier's check -- through forgery, abuse of signatory authority, or other misrepresentations
• Forging endorsements on checks received by the company from customers Manipulating pre-signed checks
• Receiving cash back from deposits without permission
• Falsifying hours worked or issuing fraudulent payroll checks

So how do unscrupulous bookkeepers get away with such seemingly unsophisticated schemes, and what can Certified Fraud Examiners do to protect their small business clients from falling victim?

Many small business owners are so wrapped up in managing the day-to-day business operations that they neglect to pay much attention to their business finances. Others don't understand the financial side of running a business, and many lack the necessary resources to hire sufficient staff to implement adequate separation of duties. Finally, too many small business owners place undue trust in their bookkeepers.

It is not uncommon for a small business owner to have one bookkeeper, usually a part-time employee or independent contractor, who handles all or most bookkeeping and accounting matters. The sole bookkeeper is usually responsible for payables, receivables, payroll, account reconciliations, financial statements, and banking matters -- anything and everything pertaining to the finances of the business. This person is frequently given open access to company financial information, and is often tasked with handling the small business owner's personal finances. As convenient as it may be to assign this much control of business and personal finances to a bookkeeper, however, it leaves small business owners vulnerable to myriad fraud schemes.

To shield their small business clients from being ripped off by fraudulent bookkeepers, Certified Fraud Examiners can encourage and assist clients in implementing certain safeguards. At a minimum, small business owners should:

• Conduct a background check on their bookkeeper, including a credit check, reference check, and criminal background check.
• Discontinue receiving paper bank, credit card, and loan statements, and, instead, access them online, and print them out for their bookkeeper. If online access is unavailable, small business owners should have statements mailed to their home.
• Review their bank, credit card, and loan statements thoroughly for suspicious transactions prior to turning them over to their bookkeeper. In examining bank transactions, they should view the front and back of checks for forgeries, phony endorsements, or other questionable transactions. Also, they should scan the front and back of deposit slips, especially for any unauthorized "less cash" amounts.
• Take a bookkeeping course to gain a general overview of the process so that they are not completely in the dark. Gain a basic familiarity with their accounting system and the various reports that it generates. In addition, they should run and review reports -- especially bank reconciliations, financial statements, payroll reports, and aging reports -- regularly for suspicious transactions.
• Learn how to perform a bank reconciliation, and perform the reconciliations themselves; or, at a minimum, thoroughly review them.
• Make their own bank deposits.
• Open all mail themselves.
• Never give signatory authority on their bank accounts to their bookkeeper.
• Personally sign all prepared checks, and never sign blank checks.
• Maintain control over their check stock, and not allow their bookkeeper unlimited access to it.
• Change accounting system, banking, and other relevant passwords immediately upon resignation or termination of their bookkeeper.
• Bring in a Certified Fraud Examiner skilled in forensic accounting to investigate any suspicious activity.
• Have a Certified Fraud Examiner with a solid accounting background perform a periodic review of their accounting records.
• Get to know their bookkeeper and watch for any questionable behavior, lifestyle changes, financial problems, addictions, etc.
• Not provide one bookkeeper with access to both their business and personal financial information. If need be, they should consider using two part-time bookkeepers rather than one full-time bookkeeper.
• Never place undue trust in their bookkeeper, regardless of how upright he may appear or the amount of time he has worked for them. Doing so is unnecessary and unwise. Honest bookkeepers should understand and encourage small business owners' needs to protect themselves and their businesses.

Small business owners need not become expert bookkeepers; however, it is unwise for them to place blind trust in their bookkeeper when they can implement the above measures without an unreasonable investment of time or money. Although these measures do not guarantee that small business owners won’t be bamboozled by a rotten bookkeeper, they do mitigate the risk.