New Mortgages Revealed, or rather, Mortgages Newly Revealed

Dear Anonymous 7.1.1:

You are misinformed. Failure to maintain proper records is in fact embezzlement - embezzlement is properly terms a "defalcation" or failure to maintain transaction documentation.

From Wikipedia:

Embezzlement is the act of dishonestly appropriating or secreting assets, usually financial in nature, by one or more individuals to whom such assets have been entrusted.[1] For instance, a clerk or cashier handling large sums of money can embezzle cash from his or her employer, a lawyer can embezzle funds from clients' trust accounts, a financial advisor can embezzle funds from investors, or a spouse can embezzle funds from his or her partner. Embezzlement may range from the very minor in nature, involving only small amounts, to the immense, involving large sums and sophisticated schemes. More often than not, embezzlement is performed in a manner that is premeditated, systematic and/or methodical, with the explicit intent to conceal the activities from other individuals, usually because it is being done without their knowledge or consent. Often it involves the trusted person embezzling only a small proportion or fraction of the funds received, in an attempt to minimize the risk of detection. If successful, embezzlements can continue for years (or even decades) without detection. It is often only when the funds are needed, or called upon for use, that the victims realize the funds or savings are missing and that they have been duped by the embezzler.

Embezzlement sometimes involves falsification of records in order to conceal the activity. Embezzlers commonly secrete relatively small amounts repeatedly, in a systematic and/or methodical manner, over a long period of time, although some embezzlers commonly secrete one large sum at once. Some very successful embezzlement schemes have continued for many years before being detected due to the skill of the embezzler in concealing the nature of the transactions.

One of the most common methods of embezzlement is to under-report income, and pocket the difference. For example, in 2005, several managers of the service provider Aramark were found to be under-reporting profits from a string of vending machine locations in the eastern United States. While the amount stolen from each machine was relatively small, the total amount taken from many machines over a length of time was very large. A smart technique employed by many small time embezzlers can be covered by falsifying the records. (Example, by removing a small amount of money and falsifying the record the register would be technically correct, while the manager would remove the profit and leave the float in, this method would effectively make the register short for the next user and throw the blame onto them)

Another method is to create a false vendor account, and to supply false bills to the company being embezzled so that the checks that are cut appear completely legitimate. Yet another method is to create phantom employees, who are then paid with payroll checks.

The latter two methods should be uncovered by routine audits, but often aren't if the audit is not sufficiently in-depth, because the paperwork appears to be in order. The first method is easier to detect if all transactions are by cheque or other instrument, but if many transactions are in cash, it is much more difficult to identify. Employers have developed a number of strategies to deal with this problem. In fact, cash registers were invented just for this reason.

Proceeds of embezzlement must be included in gross income unless the embezzler repays the money in the same taxable year.[2] Congress has ruled that lawful as well as unlawful gains are includable in gross income[3] and that it is inconsequential that an embezzler may lack title to the sums he appropriates.”[4] When the embezzler returns the victim’s funds either directly or indirectly (i.e. restitution) then the embezzler may have a reduction in taxable income.[5]

However, if a corporate embezzler can show four things,[6] then they need not include the embezzled funds in income:

“Where a taxpayer withdraws funds from a corporation 1) which he fully intends to repay 2) which he expects with reasonable certainty he will be able to repay 3) where he believes that his withdrawals will be approved by the corporation 4) where he makes a prompt assignment of assets sufficient to secure the amount owed, he does not realize income on the withdrawals under the James test.”[7]

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I would point out that internal controls were in place, but were not functional because of the hierarchal nature of the administration. Because underlings were in a position to be intimidated into cooperation, the internal control was ineffective. For a system of internal control to be effective, it must involve the relative parity of all participants in the system.

I'm an accountant, not an attorney, but as one qualified as an expert on these issues, I felt it necessary to clear any remaining misconceptions. We don't know who is guilty of embezzlement, but the fact that there was embezzlement is beyond question, in my professional opinion.

Dn. Marty
Martin D. Watt, CPA
Dayton, Ohio