Is Your Association Ripe for Embezzlement?

Highlights:

• An effective internal control system can prevent an embezzlement scheme from succeeding.
• The two basic systems are controls over checks received and controls over check disbursements.
• To safeguard their assets, associations have to take steps to reduce the opportunity for employee dishonesty.

One story:

An association’s controller ordered a supply of consecutively numbered checks from the check printer. A few weeks later she called the printer and said that a temporary agency employee the association had hired to destroy old files had mistakenly destroyed the checks just received. The controller then ordered a new set of identically numbered checks, and the printer obliged.

The controller now had in her possession two sets of identical checks. One set remained at the association’s offices, and the other set she took home. At the same time, the controller copied the association’s check processing software. This enabled her to run off on her home computer checks identical to the checks run at the office.

Every month the controller made out an association check, payable to herself, using her home computer, in the amount of $3,000. She noted the check number and cashed the check accordingly.

When she ran the legitimate association’s check at the office she was careful to run off the identically numbered check, also for $3,000, but this check was made payable to the U.S. Postal Service and charged to postage expense in the association’s records. The U.S. Postal Service had never billed the association for this expense, and the check was never mailed.

When the controller received the association’s bank statement, she simply destroyed the check made out to herself and replaced it with the identically numbered check made out to the U.S. Postal Service. If you would inspect the U.S. Postal service check, there would be no indication that it was never cashed by the post office, as the check was endorsed with th4 actual post office’s endorsement stamp by a friend who worked at the post office. The association controller had even been careful to stamp the back of the check with a bank’s cancellation stamp supplied to her by a friend who worked at a local bank.

The association’s file copy of the bogus post office check was even backed up with an actual post office receipt supplied to her by the same friend who worked at the post office.

This embezzlement had been going on for years.

• The embezzler was an employee above suspicion.
• The association was not audited by an independent certified public accounting (CPA) firm.

To safeguard itself, the association must reduce the opportunity for employee dishonesty. While accurate financial statements are obviously important, the internal control review conducted as part of an annual audit by an independent CPA firm is the only way the association can be assured that cash and other association assets are protected.

The two basic types of internal control systems are controls over checks received and controls over check disbursements.

Controls over checks:

Give serious consideration to taking advantage of a bank’s lockbox service. In a lockbox arrangement, the association gives members return envelopes with their dues invoices. The association’s name appears on the return envelope, but the address is actually the bank’s post office box. The bank deposits the checks for the association and mails the deposit slip and supporting documentation to the association’s headquarters. This is the best internal control available over checks received, as association employees never come into contact with the original check.

Some checks continue to be mailed directly to the association’s offices. When checks are received, they should be endorsed by whoever opens the mail before the checks are sent to accounting. The endorsement stamp should spell out the full name of the association and include the bank name and account number.

Never give original checks to the association department that generated the revenue.

Always require two signatures on checks; accounting personnel should never by check signers. The two signers should not be associated with approving an invoice for payment.

Never handwrite the check amount. Always use check imprinting machine or computer-protected checks.

Do not have bank statements sent directly to accounting. All bank statements should be sent directly to chief executive officer.

Have a copy of the bank reconciliation distributed with the monthly internal financial statements. Ensure that reconciled balances agree with the financial statements. Pay attention to and investigate old checks that fail to clear the bank.

Uncovering the schemes:

The chief executive officer implemented the policy of reviewing the checking account statement before sending it to accounting. She didn’t advise the controller of the change, and when reviewing the first statement, she noticed a $3,000 check payable to the controller.