Embezzlement: Warning Signs You’re at Risk and Prevention Tips

Embezzlement: Warning Signs You’re at Risk and Prevention Tips

Embezzlement is no joke—it can destroy a business or nonprofits finances. But there are warning signs you can look for, and prevention tips to safeguard your organization. This article will cover everything you need to know.

What is Embezzlement?

Embezzlement is when someone steals or misuses an organization’s funds or assets that have been entrusted to them. It often involves an employee, volunteer, or officer siphoning money away over time. According to the Association of Certified Fraud Examiners, organizations lose 5% of their revenue to fraud each year. Small businesses are especially at risk, with nearly 30% experiencing embezzlement.

Common Examples

Some of the most common embezzlement schemes include:

• Padding expense reports
• Forging checks
• Stealing cash receipts
• Using company credit cards for personal purchases
• Creating fake vendors and billing the company for non-existent services

The perpetrator often holds a position of financial responsibility, like an accountant, executive director, or treasurer. They may have worked for the company for years and gained management’s trust. But when money goes missing, they’re the prime suspect.

Warning Signs of Embezzlement

Luckily, there are red flags that indicate embezzlement may be occurring:

• Financial statements don’t add up. Look for discrepancies between bank balances, reported expenses, and cash flow.
• Lack of documentation for purchases, reimbursements, or financial transactions.
• A decrease in revenue without explanation.
• Employees refusing to take vacations or time off from managing finances.
• Unexplained changes in standard financial practices or reporting.
• Lavish spending by an employee who couldn’t otherwise afford luxury purchases.

If you notice any of these warning signs, take a closer look at your financial records and transactions. Document any suspicious activity and consult with auditors or fraud examination professionals.

Motives Behind Embezzlement

Why would someone commit embezzlement, risking their career and even jail time? There are a few common motives:

• Greed: Some people feel entitled to more money than they earn, or have an addiction to luxury goods.
• Financial trouble: Overspending, medical bills, or accumulated debt can drive someone to steal.
• Disgruntlement: Employees passed over for promotion or raises may embezzle out of resentment or revenge.
• Gambling problems: A gambling addiction can lead to embezzlement to cover losses.

Of course, motives don’t excuse unethical or illegal behavior. But understanding why embezzlement happens can help companies identify and assist at-risk employees.

Preventing Embezzlement

The best way to stop embezzlement is preventing it in the first place. Here are some tips:

• Conduct background checks on employees handling money.
• Separate financial responsibilities among multiple people.
• Require mandatory vacations from financial tasks.
• Perform regular audits and reconcile accounts often.
• Watch for red flags like lavish spending.
• Use software to monitor transactions and activity.
• Create a hotline for anonymous tips.
• Set a code of ethics and strong anti-fraud policy.

It also helps to foster a workplace culture of transparency and accountability. Employees should feel empowered to speak up about potential fraud. Make it clear that unethical behavior won’t be tolerated.

Recovering Losses from Embezzlement

If embezzlement does occur, act quickly to minimize losses. Have a forensic accountant review records to determine the full extent of the theft. Report it to your insurance company – you may be able to claim some losses under your employee theft/crime policy.

You’ll also need to confront the perpetrator and involve law enforcement. Prosecution is important to recover losses and prevent future offenses. According to the FBI, most embezzlers will confess when presented with evidence, and up to 95% of losses can be recovered if the case is dealt with appropriately.

Civil action can also help recoup stolen funds. Work with an attorney to sue the embezzler for damages. You may be able to garnish wages or put liens on property.

Bouncing Back After Embezzlement

Recovering from embezzlement isn’t just about the money. The betrayal of trust can hurt employee morale and engagement. Make sure to communicate openly about what happened, the corrective actions taken, and your renewed commitment to ethics. Bring in counselors if needed to help staff cope.

While embezzlement can certainly be damaging, organizations can bounce back with proper prevention and response. Protect your finances, watch for red flags, and foster an ethical workplace culture. If fraud does occur, take swift action to stop the bleeding and get back on track.

References

FBI. (n.d.). Common Fraud Schemes. FBI. Retrieved from https://www.fbi.gov/scams-and-safety/common-scams-and-crimes/embezzlement