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Strategic Intelligence Vol:1 No:6

The Back of the Check Tells the Story

Recently, we were contacted by a small company that provides discounts on pharmacy and medical supplies. A majority of their customers were seniors, most of which still write checks on a daily basis. Little did they know that their preferred, and a little outdated method of payment would end up hurting the company…

The company was 45,000 members strong and they charged $19.95 for their yearly membership package. One day the company started receiving calls from their members stating that their membership card was not working at their local pharmacy. A company employee thought that was very odd since something like this has never happened before, he checked their systems and noticed that all these members had not paid their yearly fee so their account was put on hold. Each member that called in was apologetic, said that they must have forgotten to make the payment and that they would send another check in the mail asap. All members except one, one was so sure that he paid, he even sent the company a copy of his check, which had been cashed. This raised some major suspicion.

After taking a deeper look into the company we found that there were only 3 employees and the owner. Two of the employees were in charge of mailing membership information and answering all telephone inquiries. Each day the owner of the company would go to the post office to collect all their payments, she would then hand them over to the third employee. The third employee was in charge of opening all the mail, logging in each check and updating the database to renew each paid customer membership.

Now if you guessed what might have happened here, then you, my friend, have what we like to call Strategic Intelligence!

When we received the copy of the check that had been cashed, via mail, of course, we noticed that the check was endorsed with the initials of the company but it was deposited into a different bank. Upon further investigation, we found that on days that there were a large number of checks in the mail, the third employee would credit each member, stating that they have paid but instead of logging all of the checks, he would pocket 4 or 5 of them and return the rest to the owner!

How did he get away with this for so long? Well, he had opened a d/b/a (doing business as) account under his SSN but used the companies initials as the d/b/a name. He would have gotten away with this much longer if he didn’t get sloppy and forget to state that the members were renewed for another year in the company database.


There are a number of lessons here...

1) In an ideal world, duties would be divided in such a way that the employee would not have had end to end control but, in a small business, that is not economically or practically feasible so simple controls are called for.

2) In this particular case, the owner may have opted for collecting the checks, opening them and counting them before turning them over to the employee. Then, when preparing the deposit, an item count would have revealed any discrepancy.

3) It is always advisable, no matter how small the company, to cross-train employees and change responsibilities from time to time and preferably without notice. Aside from being an aid to fraud prevention, this practice make a transition easy in the case of vacation, illness or resignation of an employee.

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