Embezzlement. It’s likely a word that invokes images of high-profile lawsuits, multi-million dollar scandals and corrupt CEOs or CFOs. But although employee embezzlement does impact large organizations, not all cases involve senior managers at large multinational corporations.

This is perfectly illustrated by the following a case from earlier this year. A former accounts payable manager at a unit of the Bank of New York Mellon Corporation (BNY Mellon) who was charged with bank fraud for embezzling roughly $7 million from his employer.

Understanding the forms of embezzlement and the accompanying warning signs can help you implement policies to detect and prevent this form of theft at your company, no matter the size.

Can you spot an altered or forged check? Download the free cheat sheet How to Identify an Altered Check to find out how.

What is Embezzlement?

The United States Department of Justice defines embezzlement as:

“The fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.”

In other words, embezzlement occurs when an employee trusted with the handling of company property (usually funds) decides to take some or all of that property for themselves. This may be as simple as a cashier pocketing a few dollars during a transaction, or as complex as a senior manager creating false invoices for fictitious companies in their own name.

Embezzlement is different from other forms of employee theft because it involves an employee who was entrusted by the organization to safeguard the very property that was stolen. Typically, embezzlement is seen at the management level, as managers are highly trusted with responsibility for finances. However, lower level employees are also capable of embezzling funds from an organization.

No company is immune to this act of theft. In fact, a 2016 survey by Hiscox suggests that smaller organizations may be more susceptible to employee embezzlement due to the high level of trust that exists among a smaller workforce. However, a breach of employee-employer trust can occur at any level within any type of organization.

Types of Embezzlement

Embezzlement can take many forms and may vary depending on the position held by the employee in question. Some noted acts of embezzlement include:

• Taking cash meant for bank deposits
• Altering or forging checks
• Altering payroll
• Misusing a company credit card
• Signing off on transactions without authorization
• Fabricating vendors
• Creating nonexistent employees
• Receiving kickbacks from clients or vendors

The Warning Signs of Embezzlement

Recognizing the indicators of employee embezzlement is the first step to developing a suitable prevention strategy. Though it’s often difficult to identify this type of behavior, certain warning signs can alert an employer to potential embezzlement. If you suspect employee embezzlement in your workplace, look for the following warning signs.

Business-Level Signs:

These are indicators that you may notice during the course of regular business operations.

• Missing Documents
  Financial records must be carefully maintained and preserved. These documents not only help you monitor performance and profitability, but also ensure your organization is adhering to required practices (e.g. filing taxes annually, maintaining confidentiality, etc.). These documents include payroll records, invoices, receipts and other financial statements. If an employee is embezzling funds, they may be deliberately destroying documents to erase any evidence of their behavior.
• Accounting Inconsistencies
  In addition to missing documents, a key warning sign of employee embezzlement is inconsistencies in a company’s accounting records. This could include unbalanced accounts or even an unexplained drop in company funds. Watch for these accounting inconsistencies and investigate them immediately, as they can hurt your company’s performance.

• Unusual Activities
  Every company maintains a unique standard for its daily operations. Recognizing an activity that is out of the ordinary requires employers to have a strong understanding of processes that are typical for their organization. Once standard processes are identified, employers can identify unusual activities. Examples of unusual activities include:
  • Payment issues, such as duplicate payments or unrecorded payments
  • Check changes, altered or forged checks
  • Strange transactions such as delayed bank deposit

These activities could be the result of funds being redirected to an employee’s personal bank account or may simply be the result of technical or human error. If they occur frequently over a period of time, they may indicate employee embezzlement.

Are you worried about employee embezzlement and theft in your organization? For further tips on protecting your organization, download the Detecting and Preventing Employee Theft eBook.

Employee-Level Signs:

If you have identified one or several of the above indicators in your financial records, you may also notice certain employee behaviors that point towards embezzlement. These behaviors include:

• Unusual Working Hours
  An employee misusing company funds may prefer to work during hours when no other people are in the office, such as early mornings, late nights or weekends. Working off-peak hours may enable the employee to engage in illegal behavior without the immediate threat of being caught.
• Refusal to Take Vacations/Time Off
  An employee misappropriating funds on a regular basis may insist on working on vacation days to ensure that they can keep their behavior hidden. This prevents someone else from taking over their duties and discovering the fraud.
• Insistence on Independence
  A high level of independence can ensure that an employee embezzling funds is not caught. The employee may insist on learning about processes outside the scope of their role to avoid relying on others. The employee may also be reluctant to delegate their own responsibilities.

• Salary and Spending Levels
  Certain spending indicators, if observed with the above behaviors, may suggest that an employee is misappropriating funds. An employee might reveal that they are under pressure due to high levels of debt, or they might be making lavish purchases that are beyond their salary. In these instances, it’s possible that the employee is using company money to pay for personal expenses.

It’s important to note that these employee behaviors alone do not indicate that an employee is using company funds for their personal use. However, if employee-level warning signs are observed alongside the previously mentioned business-level signs, this may suggest fraud.

Dealing with Embezzlement

What happens when an employer or manager begins noticing several of the above warning signs?

The best course of action is one that does not further jeopardize business operations. If you suspect an employee of embezzlement, do not confront them with bold accusations before an investigation has been conducted. A confrontation without sufficient proof could damage employee morale and weaken trust in the employer. Remember, your employees are innocent until proven guilty and the warning signs above are not definitive proof of embezzlement.

The first step you should take is to launch a comprehensive investigation. Collect all paper and electronic records to ensure that no documents are lost or destroyed. You may also need to interview other employees, collect additional evidence and/or audit the company’s financial statements. Only once the investigation has been concluded should you take action. If the investigation determines that employee embezzlement has taken place, you must confront this form of theft.

Preventing Embezzlement

Ideally, organizations will implement preventative measures to ensure that employee embezzlement does not become an issue. These measures include maintaining workplace policies and cultures that foster an environment of honesty and integrity.

A fraud response plan can help you detect fraud sooner and prevent it better. Download our free template to get started.

Workplace Policies

• • • Identifying problematic candidates during the hiring process lowers the potential for embezzlement at your organization. During this process, perform background checks on potential employees and speak with their references to verify that previous employers have not observed any issues.

• • • Internal controls can also be implemented to ensure that employees are following organizational policies. These controls include distributing duties among several employees, requiring supervisor approval before performing certain tasks and limiting access to company funds. Internal controls prevent one employee from maintaining full responsibility over an activity which may allow them to misappropriate funds.

• • • Organizations should perform both scheduled and random audits of their finance and accounting departments. Periodic reviews of operations will deter employees from engaging in prohibited behavior, but may also enable employers to detect unusual activity before it’s too late.

Your company’s code of conduct should support both workplace policies and culture, and clearly state your organization’s stance on employee misconduct.

For help developing a code of conduct, download the free Code of Conduct Template.

Workplace Culture

• • • Company policies are easily enforced when the workplace culture reflects the values engrained in those policies. An organization that conducts regular audits, distributes responsibility among employees and maintains strong records of all transactions will benefit from a company culture that also supports transparency and honesty. This type of atmosphere can be fostered through clear communication of values and expectations.

• • • Firms should also aim to support questions and discussions regarding workplace procedures. Employees should feel comfortable discussing workplace issues, such as cases of embezzlement, with their managers. Workplace culture should support workplace policies to create an environment free of embezzlement and other employee misconduct.

Employee embezzlement is a serious issue that can devastate a company. Whether hundreds or millions are being misappropriated, this form of theft can damage an organization’s structure, profitability and reputation. It’s essential to maintain policies and a workplace culture that can prevent this kind of behavior. However, it’s equally important that employers recognize the warning signs of embezzlement and follow the right processes for addressing the problem. This overview of employee embezzlement should enable you to prevent and detect this form of theft, keeping your workplace safe and secure.