By Robert L. Ritter, Esq.

Over the years we have represented businesses which have been victimized by their controllers/bookkeepers who have embezzled company funds.  Forged signatures on checks can be a serious problem for the unwitting business owner.  In every case we have handled, the embezzler was one of the most trusted persons in the company.

Contrary to popular belief, the bank that pays over a forged signature or endorsement is not absolutely liable for your loss.  Under the Uniform Commercial Code, your bank can claim that the company was negligent and contributed to the forgeries by, for instance, leaving checks in a non-secure location or that the business failed to review its monthly bank statements.  The real nightmare scenario is where the company has delegated all of the banking responsibilities to one person.  If that person is in charge of writing checks, receiving the monthly bank statement and reconciling the company’s checking account, the bank will have a very good defense if it honors checks with forged signatures or endorsements.

There are simple ways to reduce your company’s risk from this potential problem:

1. Separate the banking responsibilities.  The person who is responsible for writing the checks should not receive the monthly bank statements.  When the person forging signatures on checks is denied the ability to remove the forged check from the monthly bank statement, the opportunity to embezzle is severely limited.  We suggest you make arrangements for monthly bank statements to be delivered to your desk unopened.  Alternatively, you can arrange for the bank to send the monthly bank statements to your home.  The idea is to divide and conquer.  As much as possible, within the limitations of your particular business, different people should perform different bank functions.  For instance, different people to prepare checks, sign checks, receive bank statements, reconcile the accounts and handle petty cash.
    
2. We recommend you work with your accountant to review your company’s internal controls.  Your accountant will not automatically review your checking account, even if he is retained to perform an audit of your annual financial statement.  The accountant is not responsible to detect fraud.  The accountant performs certain testing functions which may uncover fraud, but, for instance, the accountant is not required to perform a detailed analysis of all checks that have been written by the company, unless he/she is specifically engaged to do so.  Additionally, we suggest you speak with your accountant to help you devise a plan to make sure that your internal controls (i.e. separation of banking function) are in proper working order.  You can also expand your accountant’s responsibility to include periodic review of the checking account activity.
    
3. Employee dishonesty insurance.  Your insurance broker can help you obtain this insurance.  It is readily available and will protect you in the event of employee dishonesty, including check forgery.  The coverage is valid even when the company’s negligence has contributed to the loss.

With these procedures in place, you can go a long way toward preventing embezzlement.