The definition of embezzlement is the misappropriation of items with which a person has been entrusted. One of the most common instances of embezzlement in today’s society is employee theft. Employees of many companies have access to company property, creating the potential for embezzlement. Examples include such small crimes as theft of retail items, discounted sale of retail items, and theft from cash registers, but can also include the theft of millions by employees of large firms.
Employee embezzlement and other forms of theft often follow a predictable pattern. First, the employee is faced with significant external pressures such as high gambling debts, mounting medical bills, or substance abuse problems. To relieve this pressure, he or she finds an opportunity to steal from the company, especially if the firm’s internal controls are perceived to be weak. From there, it’s easy to rationalize fraudulent behavior — “I’ll just take some money now, and pay it back later” or “I deserve a raise, but management’s stingy, so I’ll provide it myself” or “They’ve got plenty. They’ll never miss it.”
As a business owner, what can you do to prevent employee embezzlement and theft?
Screen job applicants thoroughly. Review a potential employee’s criminal history, verify education and past employment, and check references. If an applicant is willing to lie on a resume, why should you trust that person with your business assets? Outsource background checks for new employees.
Make your policy crystal clear. Your employees should know that theft of any kind will not be tolerated, and managers should model integrity in their interactions with clients, competitors, and government regulators. Use of an employee manual can make company policies clearer.
Segregate duties. If one employee takes in cash, someone else should prepare or oversee preparation of the cash deposit, and another should record transactions in the company books. Although such separation of duties may be hard to establish in a small company, creative owners will find ways to prevent such transactions from being concentrated in the hands of a single employee. A particular employee may be embezzling money if he or she:
• Goes out of his or her way to work overtime
• Begins spending more lavishly than salary might indicate
• Has the same address as a vendor
Conduct regular audits. Employees should know that their activities are subject to surprise reviews and an annual independent audit. They’ll be less likely to steal if they know that someone is following after them, checking their work. There are a number of warning signs of employee embezzlement. Some general indicators may include:
• Missing documents
• Delayed bank deposits
• Holes in accounting records
• A large drop in profits
• A jump in business with one particular customer
• Customers complaining about double billing
• Repeated duplicate payments
• Numerous outstanding checks or bills
• Disparity between accounts payable and receivable
• Disappearance of petty cash
Track down customer complaints. If a customer claims that a bill was paid but a credit doesn’t show up in the accounting records, an employee might be stealing your business receipts.
If guilt can be assigned to one or more individuals, the employer will have to determine what action to take against them within the company. Termination is not out of the question if there is strong evidence indicating guilt. Then, the employer must decide whether or not a civil suit will be filed and whether or not to turn the evidence over to public authorities for a criminal trial.
The penalty for an embezzlement violation typically depends on the value of the property that is misappropriated. A perpetrator is usually fined an amount on the same order of the value of the property, and may receive a prison sentence as well.
Remember, a small company can be plunged into bankruptcy by a single employee’s fraudulent activities.