Embezzlement Affects Most Companies, So Remain Vigilant

Business owners don't like to think about embezzlement taking place in their companies. But the reality is that this type of fraud is extremely common. According to a survey conducted by business insurer EmBroker, 75% of employees have stolen from their employers at least once. And "Occupational Fraud 2024: A Report to the Nations," published by the Association of Certified Fraud Examiners, reports that, on average, organizations lose 5% of revenue to fraud annually.

So don't stick your head in the sand and claim, "it can't happen here." Instead, learn how embezzlement can occur, particularly in your accounting department, and put safeguards in place to foil potential perpetrators.

Defining Embezzlement

The U.S. Supreme Court defines embezzlement as the fraudulent appropriation of property, including money, by someone entrusted with that property (Moore v. United States, 160 U.S. 268, 1895). You may wonder how embezzlement differs from larceny. With embezzlement, the initial taking is lawful and only subsequently becomes unlawful. For example, an accounting employee might collect accounts receivable and then illegally deposit business checks in his or her own bank account. With larceny, criminal intent occurs at the time of the taking — the criminal never has a right to the property.

In general, embezzlement is a white-collar, nonviolent crime. However, it may be committed by a wide range of trusted employees — from CEOs to middle managers to entry-level workers. Third parties who aren't employed by your company (such as contract workers or vendors) may also be able to embezzle property if they have adequate access.

Embezzlement can occur at a business of any size. Contrary to popular belief, this crime isn't limited to large employers with vast assets (although those companies certainly are vulnerable). But small-to-midsize companies may have fewer internal controls in place to prevent fraud. They're also typically less capable of bouncing back if they suffer embezzlement losses.

Forms and Penalties

Embezzlement takes many forms. For example:

• A corporate officer or someone in a position of authority might misappropriate or misuse funds.
• A salesperson who travels frequently for business could falsify reimbursement requests.
• An accounting staffer might organize a payroll fraud scheme by inventing nonexistent employees.
• Nonprofit volunteers could keep a charity's cash donations for themselves.

Penalties for embezzlement vary by state. But a conviction for embezzlement could result in incarceration, a fine or both. States usually base penalties on the value of the money or property stolen. They might impose higher fines or longer sentences for amounts that exceed certain thresholds.

In addition, most states require convicted embezzlers to pay restitution. Typically, convicted company officers must pay back all, or a portion, of the ill-gotten gains. Certain professionals, such as attorneys or other fiduciaries, may face more stringent penalties and restitution mandates than other embezzlers.

Warning Signs

To prevent embezzlement from fleecing your organization, look for red flags, including:

• ‍Financial statement anomalies. Scrutinize revenue slowdowns, increased liabilities, unexplained delays or omissions of payment, as well as evidence of financial distress that you weren't expecting.‍
• Falsified or missing records. Employees who embezzle usually have to cover their tracks. If receipts, documents or files can't be found, or have been mysteriously destroyed or corrupted, an embezzling employee could be to blame.‍
• Employee behaviors. If an employee acts secretive, insists on working alone, refuses to take time off or acts defensively when questioned about work, the employee could be attempting to hide a fraud scheme. Individuals who seem to have addiction issues or financial problems (due to gambling or divorce, for example) may be more likely to commit embezzlement if given the opportunity. Also, angry, resentful or dissatisfied workers tend to commit fraud in higher numbers. So make employee morale a priority.

Be Careful

No one red flag, or even several anomalies, prove that embezzlement is occurring. So be careful not to make accusations unless you have solid proof that a person is committing fraud.

If you suspect something is awry, engage a forensic accountant to investigate and find potential evidence that can hold up in court, if necessary. And to prevent embezzlement from occurring in the first place, make sure you establish and consistently adhere to strict internal controls. Also, obtain regular professional audits.