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April 19, 2022
18-Year Employee Embezzled for 7+ Years
5 Tips for Lenders & Shareholders to Minimize Risk
Employee Embezzlement at Ethnic Food Company
When a long-time employee of an ethnic food company went on vacation, her colleagues discovered a bank account discrepancy. It turns out their vacationing colleague had been embezzling from the company for at least 7 years.

At the request of the company’s lender, Brandlin & Associates was retained to assess the company’s internal controls to understand how the fraud was perpetrated and minimize risk in the future.
Blatant Fraud for (at least) 7 Years
The family-owned, global company has growing revenues and is profitable. But its profits were understated by at least $1.3 million between 2014 and 2021 as a result of the employee’s fraudulent activities.

Our discovery process uncovered how easy it was for the employee to commit these crimes. Her responsibilities included accounting and payroll duties. She simply:

  • Paid her husband’s janitorial company, which did not have a contract to provide services, up to $255,000/year from various company bank accounts, masking the payments across numerous General Ledger accounts.
  • Created and paid two fictitious employees.

Bottom line, there were a number of weaknesses in the company’s system of internal controls, primarily in relation to the segregation of duties. We provided management with a roadmap of best practices, including defined internal controls and a matrix of proper segregation of duties. Our work might be useful in civil and criminal cases against the ex-employee and potentially against the company’s outside auditors.

5 Tips for Lenders & Shareholders
The lender was fortunate that the fraud did not compromise its loan to the company and the owners were lucky their company remained profitable. Nonetheless, we recommend implement the following best practices to minimize the risk of employee embezzlement at your portfolio companies:
1.  Those who prepare checks or disburse currency should not be authorized to sign checks, have access to cash receipts or accounting records, or perform bank account reconciliations.

2.  Those who perform cash disbursement functions (i.e., authorize, sign and issue checks) should not process vendor invoices, maintain accounts payable records or prepare payrolls.

3.  Those who perform payroll functions, including approving employee time records and preparing input for payroll checks, should not perform any payroll check-signing or distribution functions or have access to cash or accounting records.
 
4.  Employee files that include approved pay rates and authorized deductions should be maintained by a personnel department that is separate from the payroll department.

5.  Those who handle physical inventories, including contact with the company’s manufacturing personnel, and store and issue inventories for manufacture or shipment should not perform purchasing, receiving, shipping, billing, MIS or accounting activities, or maintain perpetual inventory records.
How Can We Help You?
Brandlin & Associates is an exclusive provider of financial workouts and restructurings, forensic accounting, financial due diligence and litigation support for senior lenders, mezzanine funds, private equity groups, attorneys and middle market companies.

We pride ourselves on offering superior technical expertise, years of practical experience and unparalleled service to decipher financial and operational performance metrics. As a result, our clients are able to make informed decisions in a timely manner.