What Business Owners Should Know About Embezzlement

Embezzlement constitutes a serious crime and can lead to the collapse of a business. From small businesses to the largest multi-national corporations, embezzlement can wreak havoc on the financial health of both the business and its shareholders and owners.

How Embezzlement Typically Occurs in a Business Setting
Embezzlement comes in many varieties, but the most common forms include:

• Theft. The most common form of organizational embezzlement, theft, involves the direct transfer of funds from business-controlled bank accounts to the thief's account.
• Check/invoice fraud. This method involves creating doctored checks or forged invoices. The perpetrator then sends the invoice to the business for payment.
• Credit card fraud. With credit card fraud, the perpetrator uses a company-owned credit or charge card to make personal purchases.

Other methods of embezzlement include payroll fraud, fraudulent lending, and outright property theft.

Patterns of Embezzlement in Organizations
Often, when a perpetrator embezzles company property or funds, they typically do not make large transfers. Instead, they usually spread their crimes across several smaller incidents in order to stay undetected by audits and existing organizational accounting controls.

A forensic accounting firm can make use of specialized pattern detection audits to root out possible embezzlement through careful analysis. However, organizations also benefit from implementing specialized controls to both deter and detect embezzlement and mitigate the financial damage.

How Businesses Protect Themselves Against Embezzlement
While embezzlement remains a challenging problem for many businesses of all shapes and sizes, there are several tools that even the most cash-strapped organizations can implement to prevent more overt attempts at theft:

• Staff more than one team member for each transaction. Staffing more than one employee on matters affecting financial transactions can deter embezzlement.
• Periodic audits of key financial statements. Owners and senior management should regularly review key financial statements for discrepancies and variances.
• Make use of employment and criminal background checks. Querying potential hire backgrounds can reveal previous financial crimes.
• Purchase business insurance. Some types of insurance policies can help owners to recover from losses derived from embezzlement.
• Retain the services of a professional accounting firm. A seasoned accounting firm can bring a wealth of experience to bear on forensic investigations of embezzlement.

Ultimately, a combination of these deterrents and controls can help to reduce the incidence of embezzlement in an organization.

Embezzlement Appears More Common at Smaller Businesses
While small businesses bring many benefits to local communities, they unfortunately also must contend with higher rates of embezzlement and other financial crimes. The reason for this higher incidence rate may stem from a lack of professional and dedicated financial controls within the business.

Another unfortunate downside of embezzlement comes from the loss of faith in the business by owners, shareholders, and employees. Each of these stakeholder groups inevitably suffers from financial crimes, including lost profits, wages, and job security.

Common Themes of Embezzlement in Small Businesses
Based on research into embezzlement practices, certain patterns appear to follow those individuals who have tendencies to steal property or redirect funds to their own accounts:

• They have pressure to steal, such as debt or medical bills.
• They have access to company accounts or funds with limited oversight or financial controls.
• They have sufficient knowledge of how the firm operates to evade detection from senior management or accountants.
• They can rationalize their behavior to justify the misdeeds.
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With all four attributes of pressure, access, knowledge, and rationalization, perpetrators can start with small-scale theft and move toward larger embezzlement incidents.

Learn More about Forensic Accounting Services
At Williams & Associates Tax Services, we offer specialized forensic accounting services for businesses of all types and sizes. Get in touch today to learn more!