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Background Checks And Audits Help Curb Embezzlement Risk In Family Offices

A former accounting manager who was recently extradited from Costa Rica faces 10 counts of wire fraud for allegedly embezzling more than $36 million from his former employer, a Los Angeles media technology services firm.

The accounting manager first worked as an independent contractor and then as an employee with the organization. The alleged embezzlement occurred between 2009 and 2016.  

The accounting manager carried out the fraud by creating a fake Nevada-based corporation with a name that was similar to a vendor used by his employer. He then forged letterhead, using the real letterhead of the vendor, on which to send fake invoices to the employer, according to a spokesperson for the U.S. Department of Justice (DOJ).

The DOJ states that the former accounting manager was able to use the authority of his position to approve and direct payments to a bank account in his fake corporation's name over which he had sole control.

With the stolen money, the accounting manager allegedly paid off $23 million in credit card debt, transferred $8 million to his personal bank accounts, and spent millions on other expenses. Brian Day "Suspect in $36 Million Embezzlement Extradited to L.A. From Costa Rica" ktla.com (Feb. 14, 2019).

Commentary and Checklist

Giving a staff member control over your finances also gives that person the opportunity to embezzle, if you do not put proper controls in place. Family employers must be judicious in hiring qualified, trustworthy people and be careful about setting up oversight measures to prevent embezzlement.

Always perform a thorough background check, including talking to several references and other clients in detail, before hiring staff to manage your finances. Never hire someone if there is evidence of financial misconduct; if references won't comment at all, or if you detect any lack of enthusiastic support of their work.   

Best practices dictate that family employers require frequent, routine, and thorough independent, third party financial audits. External auditors provide unbiased review and are trained to spot any financial discrepancies. If auditors uncover any suspicious accounting, do not ignore the problem. Any signs of fraud should be addressed immediately so that the situation does not become worse.

Make sure that multiple individuals have knowledge and oversight of your funds to reduce the likelihood of fraud or embezzlement. 

No person, even the most trusted, should be exempt from your financial oversight system. Best practice requires that everyone be treated equally when it comes to audits and financial reviews. 

Here are some other ways you can keep your finances safe:

  • Only hire someone who has the required qualifications and is capable of performing the job duties well. If certification, such as a CPA license, is necessary, ask them to provide evidence of annual renewal to keep on file.
  • Implement a systematic policy for auditing financial records that includes routine third party auditing and carry out the policy religiously.
  • Train staff on the procedure for reporting suspected wrongdoing and make sure that all reports are handled anonymously and result in a thorough investigation.
  • Investigate any reported matters right away. 
  • Routinely check your credit score and investigate possible illegal causes if your score is unjustifiably low.
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