Detecting Embezzlement Schemes: How to Catch Someone Embezzling from Your Business

No matter how a smart business owner you think you are, you’re at risk of losing money to an embezzler – this person could be a trusted employee, family member or even your bookkeeper. As long as you own a business, you are not immune to embezzlement. Don’t assume that your employees will not steal from you.

According to a study by the Association of Credit Fraud Examiners (ACFE), organizations lose an estimated 5% of their revenue for the year because of fraud, and it’s not uncommon for employees to be responsible for that fraud. There are strategies to fight it, though; using professional grade accounting software can help you catch someone who is embezzling from you. These systems have the ability to limit employee access while allowing you, the business owner, the capacity to monitor all employee activity in your finances.

But even those systems aren’t foolproof. While it might seem like embezzlers are always getting caught, many employees still embezzle assets from a business without getting caught for years, draining small businesses of needed profits fraudulently. In fact, the same study by ACFE found that the longer a fraudster worked at an organization, the more they stole: the median loss caused by employee fraudsters with six to ten years of tenure totaled a whopping $200,000. No business, big or small, wants to lose that kind of cash.

Small business owners need to be vigilant before they lose their assets. Luckily, in this article, we’ll help you learn more about what embezzlement schemes look like, how to catch an embezzler, and how to prevent future employee theft.

Understanding Embezzlement

Embezzlement is a form of white-collar crime that involves the intentional misappropriation of assets entrusted to an individual or organization. Essentially, it’s a breach of fiduciary responsibilities where someone diverts funds for personal use. In short, it’s insider stealing.

This theft can happen in various ways, such as transferring money to personal accounts or using company assets for personal gain, like using the company card for personal expenses. Embezzlement can be committed by anyone with access to an organization’s funds, including employees, executives, or even family members.

Detecting embezzlement can be challenging because it often involves the manipulation of financial records and transactions. However, there are common signs that can indicate something is amiss:

Unexplained discrepancies in financial records
Unusual or unauthorized transactions
Missing or altered documents
Unexplained changes in financial statements
Unusual or excessive spending

By being vigilant and aware of these signs, you can better protect your business from this type of white-collar crime.

6 Common Embezzlement Schemes

Here are some effective ways to spot the red flags that could indicate that an embezzlement scheme is looting your company.

1. Undercharging Customers

This is one of the most common ways of embezzlement. If you run a retail firm, it’s good to keep an eye on your record books on a daily basis. Cashiers in retail firms will undercharge friends and family members for your merchandise, effectively stealing your profits for their gain. A store clerk may also steal a small amount of money from the cash register, showcasing how embezzlement can manifest in various scales.

2. Ghost Supplier

A fraudulent employee may set up a ghost supplier and create fake documents showing legitimate transactions with this fake business. He or she will make payments to the ghost supplier (that is himself or herself) and then spend your hard-earned money however they please.

3. Fake Refunds

A fake refund is a refund that is issued to a customer who doesn’t exist. The fraudulent employee steals the refund money for themselves instead. E-commerce businesses often suffer from this type of theft.

4. Stealing Office Supplies

A fraudulent employee will use the company’s postage stamps, equipment, and supplies for their personal reasons without getting noticed. They will even make long distance phone calls and charge the personal bill to the company. Employers might not notice this because the employee is technically allowed to use those supplies for work.

5. Fictitious Bad Debt

A sneaky accountant or bookkeeper will deposit a customer’s check in his or her bank account and record the receivable as a bad debt. Then they pretend that the customer never paid their bill and thus the debt had to be written off, all while happily spending the employer’s cash. Individuals may also siphon funds from company resources, including small withdrawals from bank deposits, to avoid detection over time.

6. Payroll Fraud

An enterprise embezzler can sometimes add fictitious employees (often their relatives) to your company payroll and send them regular fake paychecks, which ultimately go to the employee themselves.

Now that we have established some of the nefarious ways that an embezzler can steal assets from your company, let’s look at some of the warning signs of an embezzler.

Warning Signs Someone Is Embezzling Company Assets From Your Company

As a company owner, you must be continuously aware of all activities taking place in your company. If you aren’t, then chances are you are already losing your property to some embezzlers. Look out for these warning signs of embezzlement:

An employee who does not want to go on vacation. Such an employee is usually trying to hide his or her sneaky ways of embezzling your property. They simply don’t want their replacement to detect their activities.
An employee who is more than willing to work overtime all the time. It’s during the overtime, when managers are off duty, that they complete their fraudulent activities. These people appear to be working extra hard as an act of generosity just so that you not suspect them of embezzlement.
An employee who starts to spend extravagantly. If your employee starts living a rich lifestyle (think getting fancy new cars and paying for exotic travel) that is way above their pay grade, then it’s time for you to take a closer look at your accounts and assets for signs of embezzlement. He or she could be selling your property or have found a way to spend your money under your nose. Employees might also use company credit cards for personal purchases, disguising them as business expenses.
An employee with access to petty cash. If you realize that your petty cash is getting spent more quickly than it should, then there may be someone stealing it.
An employee who’s always spending lots of time with your vendors. If you realize that there’s an employee spending a lot of time with your vendors, they could be running a scheme with those vendors, draining your company’s cash flow.
An employee with responsibility for buying office supplies. If you notice disappearing office items and you are always buying new office equipment, there could be an employee who’s taking your office items home for their own home-based business.

Once you notice any of the above red flags, it’s time to investigate properly.

Investigating Suspicious Activity

If you detect suspicious activity, it’s crucial to investigate promptly and thoroughly. An independent party, such as a forensic accountant or state or federal agencies, should conduct the investigation to ensure objectivity and accuracy.

The investigation should include:

Reviewing financial records and transactions to identify any irregularities
Conducting interviews with employees and other relevant parties to gather information
Analyzing financial statements and reports for inconsistencies
Identifying and documenting any discrepancies or irregularities
Determining the extent of the embezzlement and the individuals involved

A thorough investigation will help you understand the scope of the issue and identify the perpetrators, allowing you to take appropriate action.

How to Prevent Employee Embezzlement and Expense Reimbursement Fraud

For you to prevent employee theft, you must be familiar with most of the methods that an embezzler will use to steal from you. Here are some preventive measures you can take to avoid embezzlement from your small business:

Deposit on a daily basis. Money sitting around in your office can be very tempting for some of your employees. Deposit any money that’s not in immediate use and keep a tab of all your bank statements on a monthly basis.
Divide financial duties. Do not assign all financial tasks to one employee. Divide the financial tasks to several employees to spread out your risk. If one decides to start stealing, you’ll spot it more easily from their records to know which employee is the thief. This also helps with detecting any attempts at diverting funds for personal benefit.
Track your petty cash. Ensure that the petty cash in your company is well utilized by keeping a log of how the money is being spent. Also, make sure that two or more employees must sign before refilling the petty cash drawer.
Manage by walking around your premises regularly. When you walk around keeping an eye on how things are running in your business, employees will know that you are always watching them. Don’t get into their personal privacy. Just observe from a distance, especially on off hours which when most theft occurs.

These preventive measures are general to all companies. Analyze your particular business operations from all angles and think like an embezzler. What ways could they use to embezzle your property?

Communicate that employee honesty is paramount from day one with all new hires. Ensure that all your employees know that you require them to be honest. The best thing to do is create a policies and procedure manual that they must sign as a condition of employment.

Before you lose money through embezzlement, you could also consider talking to an employment attorney. This type of attorney knows all your local employment laws and how expertly handle and prosecute cases of embezzlement.

Your attorney will help inform you of your employment rights and how to properly deal with any suspected or actual embezzlement in your company. Then, if you suspect that an employee is embezzling from your company, you can call your attorney for their legal advice on how to handle the embezzling staff member.

You will be in a better position to handle embezzlement cases in your company if you are aware of the necessary steps to take once you catch an embezzler.

Taking Action Against Embezzlement

Once embezzlement has been detected and investigated, it’s essential to take swift action to prevent further losses and hold the perpetrators accountable.

Actions to take include:

Terminating the employment of the individuals involved to stop the embezzlement immediately
Freezing bank accounts and assets to prevent further diversion of funds
Conducting a thorough audit of financial records and transactions to understand the full extent of the embezzlement
Implementing new internal controls and procedures to prevent future incidents
Reporting the embezzlement to law enforcement and regulatory agencies to ensure legal accountability
Pursuing civil and criminal action against the perpetrators to recover lost funds and deter future crimes

To prevent embezzlement from occurring in the future, consider the following steps:

Implement robust internal controls and procedures to safeguard financial resources.
Conduct regular audits and reviews of financial records and transactions to detect any irregularities early.
Provide training and education to employees on embezzlement and financial management to raise awareness.
Encourage a culture of transparency and accountability within the organization to foster an environment where unethical behavior is less likely to occur.

By understanding embezzlement, investigating suspicious activity, and taking decisive action, you can help protect your business’s financial resources and prevent this type of white-collar crime.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.