Could this happen in your office…?

A recent FBI press release described how a dishonest employee of a North Carolina municipality embezzled over $90,000. It seems she was issuing receipts for cash payments and pocketing the cash, then adjusting the accounts so customers wouldn’t notice the missing payments. She was caught when she failed to adjust a customer’s account for a payment she kept and the customer produced the payment receipt.

Could something like this happen in your office…?

Poor internal controls

Clearly this was a case of management not implementing effective internal controls and not maintaining proper separation of duties, as the last Utility Information Pipeline described.

Never, ever should the employee who receives payments be the same person who also approves adjustments to customer accounts. Something as basic as having a supervisor review and approve adjustments could have identified this fraud immediately.

My experience with fraud cases

In my career spanning 30 plus years, I’ve assisted in explaining or investigating a handful of utility embezzlement cases. Each of these cases involved dishonest employees pocketing cash payments. Some were more creative than others in attempting to cover it up.

One case involved a customer service clerk who embezzled security deposits paid in cash. This employee then used a supervisory override to enter the deposit in the system without receipting the cash. This way, the customer would still have a deposit applied to their final bill and wouldn’t complain. This practice went undetected for several years. Had this utility been reconciling deposits on a regular basis, this would have been detected the first month it happened.

Another case involved a cashier voiding every cash payment in a day’s work and pocketing the cash. Obviously, this wasn’t the smartest embezzler, as the fruad was caught the next month when multiple customers complained after receiving bills with no payments credited to their accounts. Even though the embezzlement was caught quickly and the employee was immediately fired and prosecuted, the entity involved still had to deal with the negative publicity and the ensuing investigation.

Adopt a cash handling policy

Every office should have a written cash handling policy that all employees are familiar with and abide by.

Here are some standard practices that should be included in a comprehensive cash handling policy:

  • Assign each cashier a separate cash drawer
  • Issue hand written receipts only in emergencies
  • Receipt payments as they happen
  • Account for cash overages and shortages
  • Monitor voided payments
  • Have a second employee double check each deposit

Let’s take a look at each of these in more depth…

Assign each cashier a separate cash drawer

Many smaller offices share a single cash drawer out of convenience. However, if you experience cash balancing problems, the only way to identify the responsible party is for each cashier to be accountable for their own cash drawer.

Issue hand written receipts only in emergencies

Hand written receipts should be avoided at all costs, unless the power is out or your system is down. Issuing hand written receipts and pocketing the cash is the most prevalent method of embezzling payments.

If your software isn’t capable of generating a receipt for all types of payments, including cash receipts that aren’t billed, it’s time to look for new software!

Receipt payments as they happen

Payments should be receipted as they take place. Many offices allow customers to drop off checks and enter them in the system later. This is not a good cash management policy and should be avoided. If employees see this as acceptable for check payments, will they also be tempted to do the same for cash payments?

Account for cash overages and shortages

Cash overages and shortages should be tracked by cashier. Even the best cashiers make mistakes counting change, so an occasional cash overage or shortage is to be expected. Not tracking overages and shortages makes it easier for employees to shortchange a customer and keep the cash. For utilities that base employee evaluations on performance measures, the number and amount of cash overages or shortages is an excellent performance measure for cashiers.

Monitor voided payments

All voided payments should be reviewed and accounted for, especially voided cash payments. An excessive number of voided payments, while not necessarily indicative of embezzlement, may often be the sign of a careless cashier.

Interestingly, Logics’ Central Cash Collections application includes a void payment edit list because, years ago, a very astute finance director had a feeling one of her cashiers was voiding too many payments and wanted a way for these to be monitored.

Have a second employee double check each deposit

Each cashier’s daily deposit should be double checked by another employee. This insures accuracy and accountability and sends a signal to your staff that honesty and integrity are essential.

Is it time to review your cash handling policy?

Have you reviewed your cash handling policy recently? If not, this might be a good time to do so.

If you don’t have one, I encourage you to develop and adopt one.

If you would like assistance developing or reviewing your cash handling policy, please give me a call at 919-232-2320 or e-mail me at

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© 2014 Gary Sanders

How effective are your internal controls?

I recently completed a business review for a small utility in which I recommended purchasing new billing software, among other internal changes. As I finished presenting my report to the management team, the general manager slid a page across the table and asked “Will implementing your recommendations take care of this?”

What he showed me was the exceptions page from their most recent annual audit in which the auditors had cited the utility for inadequate separation of duties.

Separation of duties

Separation of duties is a form of internal control based on having more than one person involved in a process to prevent errors and fraud.

For example, in a utility business office, the following combinations of tasks should be divided among two or more employees:

  • Issuing bills and accepting payments or adjusting accounts
  • Accepting payments and adjusting or writing off accounts
  • Accepting payments and preparing bank deposits
  • Approving and entering adjustments to accounts
  • Writing checks and reconciling bank statements

Limited staff

The reality in many small offices with limited staff is that it’s not possible to separate all of these responsibilities.

Such was the case with the utility described above. They have two customer service representatives who also function as cashiers and one billing clerk. The billing clerk fills in for the customer service reps during their lunch hours and this is what the auditors cited in their audit exception.

I explained to the general manager, as I suspect he already knew, that what he faces is a staffing issue, not something new software will remedy. Unless he is willing to hire another person or have only one person in customer service during the busy lunch hour, this will be a perennial issue.

Effective oversight

In cases like this, a strong set of checks and balances is vitally important to protect the organization against dishonest or fraudulent acts.

Have a supervisor or manager review all transactions before they are updated. This is especially important for adjustments, which are the easiest way to try to cover up payments that are pocketed.

I recommend periodically reviewing your internal control policies and procedures with an eye out for how they can be improved. And don’t stop at just reviewing your written policies – take time to insure and validate they are being followed as intended.

Is it time to review your internal control policies?

Do you need to take a look at your separation of duties or internal control policies? Please give me a call at 919-232-2320 or e-mail me at to learn more about how a business review could assist with reviewing your policies and procedures.

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© 2014 Gary Sanders