Kathy Foer-Morse embezzled $300,000 from the law firm she worked for in New York in 2005. She did it again in Pennsylvania and used some of the money to pay restitution to the New York firm. Apparently this happens all the time. It’s especially common in small firms.

The most frequent perpetrators are paralegals, mostly women, who have been with the firm for several years. They are usually delegated a great deal of authority and provided with little oversight. They avoid leaving for vacation to keep their activities from being detected.

Embezzlement is getting worse since the downturn in the economy. But, this is nothing new. Employees have been stealing from their firms for a long while. One firm, in New Orleans, closed it’s doors as a result of embezzlement. Cutting staff, during a recession, makes matters worse since supervision is reduced.

The Association of Certified Fraud Examiners (ACFE) recently conducted a study and found that the median loss, in the 959 cases examined, was $175,000. The theft went undetected for two years in most cases. Most perpetrators were first-time offenders and had a clean record prior to getting caught. Most were caught as a a result of tips from employees or others. Most cases involved small businesses.

What can you do to be sure this doesn’t happen to you? Look for the fraud in the obvious place – the accounting staff. Use checks and balances – make sure more than one employee is involved. Divide deposit making from bill paying. Use cross-training and job rotation so that different employees are exposed to all of the data. Make employees take vacation.

Most importantly – use surprise internal audits. It’s got to be a surprise. Do it yourself if you’re all you’ve got. Don’t be so trusting. Dig in and examine everything.

ACFE pubished a full 68-page report if you’re looking for more information.

I think our practices sound exactly like the typical victims. I bet there are a bunch of you reading this and starting to worry. Sounds like we need to plan a surprise.