Why Do Employees Embezzle? How to Protect Your Business

February 2019 | Article

It doesn’t happen here! Not to our business! Our employees would never steal!

We commonly hear comments like these when our forensic team is brought in to investigate a possible embezzlement. No one wants to believe their trusted employees would pocket money. But it happens here, it happens everywhere. And it occurs more than anyone would like to believe.

So, what makes these fraudsters steal from their employer, and how can you prevent and/or detect fraud in your business?

The Four ‘B’s
Our forensic team has years of experience learning why embezzlers steal. Forensic accountants have discovered employees generally embezzle for at least one of the four “B”s.

  • Bills – Employees may embezzle because they are having financial difficulties and need money to pay their bills.
  • Bets – Gambling addiction is common reason employees steal funds to pay for their need to bet.
  • Booze – Employees may have a drug, alcohol or other addiction that causes them to embezzle to pay for these habits.
  • Bling – Living beyond one’s means or “keeping up with the Jones” is another reason employees steal to live a lifestyle outside of their current means.

These signs, or red flags, let an employer know that an employee may be struggling and may need help. If you have an employee that is exhibiting some of these signs, it is important to examine the employee’s job duties and identify what risk/opportunity the employee may have to steal from the organization.

According to the 2018 Association of Certified Fraud Examiner’s (ACFE) Report to The Nations, other top red flags include:

  • Employees who have unusually close relationships with vendors and/or customers
  • Employees that are unwilling to share their job duties and let other get involved with their work
  • Employees going through divorce or experiencing family problems
  • Employees who have a “wheeler-dealer” attitude

Embezzlement-Red-Flags-Graphic

It’s important for business owners to remember when we are talking about fraudsters embezzling from a business, it’s not always money they are taking. It may be embezzlement in the form of inventory or payroll.

Inventory Theft Example
A past fraud investigation identified a fraud scheme involving an employee theft of $950,000 worth of medical and office supplies over a four-year period. The employee was responsible for all duties involving inventory from ordering to receiving and counting to recording. This employee stole these items from their employer, sold them online and used the funds for gambling (one of the four “B”s).

The organization noticed the large inventory adjustments being taken for these items but believed it was a business problem, not a fraud problem, until they eventually retained us. After a thorough a forensic accounting and computer forensic examination, this scheme was identified, documented and turned over to authorities for criminal prosecution and restitution.

Internal Controls
Like many businesses, there are not enough staff and resources to implement perfect internal controls to prevent all frauds from happening. That’s okay! Although a business may be unable to prevent fraud from occurring, the business should be able to detect fraud to minimize any losses.

Some common preventative internal controls include:

  • Check stock and company credits cards are stored in a locked drawer
  • Dual authorization methods are used for electronic bank transfers
  • Accounting and computer software has user restrictions setup limiting access to individuals
  • Inventory is locked with limited employee access
  • Employee background checks are performed

The following detective controls can be helpful in identifying fraud:

  • Bank reconciliations, including cancelled checks, are reviewed by someone independent of the accounts payable process
  • Mandatory vacations or cross-training/job rotations are required for staff
  • Inventory counts are done by someone other than the person ordering, receiving and recording inventory
  • Credit card statements are received and reconciled by someone who does not have access to a company credit card
  • Audit trail from an organization’s accounting system should be reviewed for unusual activity
  • Periodic surprise “audits” or request for invoices/supporting records should be performed by someone independent of those handling the day-to-day accounting for an organization

Learn more about Preventing Fraud at your Organization

According to the latest ACFE Report to The Nations, lack of internal controls is the leading reason fraud occurs.

Internal-Controls-and-Fraud-graphic

Don’t let your business be the next fraud victim in the news. Evaluate your current internal controls, educate yourself and your staff on possible red flags and implement proper preventative and detective controls. It’s a good practice to have annual discussions with staff regarding the internal controls your organization has in place to prevent and/or detect fraud. Increasing the perception of detection is the most cost-effective fraud deterrent for any organization.

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