This scenario is based upon an actual instance where the auditor of a charitable organization uncovered red flags that indicated a very high risk of misappropriation. The employee under suspicion was responsible for essentially the entire finance function. She received all cash receipts, made all disbursements for the organization, independently handled the bank reconciliation each month, and performed a variety of additional accounting functions.
In a casual conversation with this employee, the audit senior discovered that the employee had recently moved to the West Coast to “start over.” Intrigued with the employee’s adventurous spirit, the auditor asked why she had looked for a change of scenery. The employee acknowledged that in her “past” life she had developed quite an interest in options, futures, and commodities. She indicated that she had made some unfortunate investments that had resulted in losses that exceeded $100,000. She had covered these losses by using cash advances on several credit cards. Her financial difficulties ultimately had led her to declare personal bankruptcy.
The audit senior significantly increased the scope of the audit, but no concrete evidence of employee misbehavior was discovered. At the conclusion of the audit, the audit senior communicated to the Executive Director his concerns about the finance employee and the substantial risk she represented to the organization- both her lifestyle behavior and the lack of segregation of duties. The Executive Director acknowledged the fact that no background check had been conducted on this employee, and as a result he (and the organization) were unaware of the employee’s investment activities or bankruptcy. The unusual behavior or lifestyle of an employee with access to assets susceptible to misappropriation should be a red flag.