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Embezzlement is defined as theft conducted by employees or other trusted business parties. It usually involves an employee (or anyone affiliated with the company) diverting company funds to gain an illegal profit. But, how to prevent embezzlement?
However, it can also include the theft of inventory, office property, and even data. Embezzlement can run the gamut from elaborate false accounting and bookkeeping scams and unauthorized fund transfers to simple theft of property or petty cash. Depending on the scale of the crime and how much money or securities end up being stolen, embezzlement can be a serious felony.
While it may be distasteful to think that your employees may be stealing from the company or hatching a plan to do so, it’s still an unfortunate reality for which business owners need to be prepared. The damage caused by embezzlement can be significant. In fact, more than 30% of all business bankruptcies have been linked to embezzlement and employee theft.
The Difference Between Fraud and Embezzlement
Embezzlement always involves fraud, but fraud does not always entail embezzlement. The main difference between the two is the fact that embezzlement involves the business placing trust in their employees or contractors to handle certain assets.
When fraud occurs, someone is giving false information, but embezzlement always involves a business. For example, getting scammed via a phishing scheme could be a type of fraudulent activity, but it isn’t embezzlement. But if your Chief Financial Officer steals money directly from your company by falsifying documents, it’s both fraud and embezzlement.
Fraud steals funds from a company in a bit of a roundabout way, with one party tricking another in order to gain access to information or funds. Embezzlement refers to the direct stealing of funds from a company.
How To Prevent Embezzlement
Let’s discuss what you can do to reduce the risk of embezzlement and what options you’ll have if a criminal act committed by your employees causes significant financial damage to your business.
And while this is not an exhaustive or comprehensive list, it should get you started in taking your company’s first steps towards preventing and neutralizing the threat of embezzlement.
Conduct Background Checks When Hiring
When looking to hire full-time employees or contractors, it’s a good idea to do your homework before hiring. Take the time to go through their references. Is there anything in their employment history that’s suspicious or points to them being a risk for your company?
According to a HireRight report, 85% of employers uncovered a lie or misrepresentation on a candidate’s resume.
For high-level positions, where the candidates may have access to your funds and computer systems, it’s wise to expand your hiring process to include detailed background checks. If you decide to go this route, you must create a background check policy for your company.
The policy should document what checks will be conducted, how the information collected will be used, and who will be able to access it. This will help to ensure that the process is fair, safe, and transparent for everyone involved.
Also, keep in mind that if you are going to conduct background checks, it’s crucial to ensure that the entire process is legal and compliant. Take into account the Fair Credit Reporting Act (FCRA), the Equal Employment Opportunity Commission (EEOC) guidance, and all state and local regulations when considering checking potential employees.
For instance, under the FCRA, you must first notify the candidate of your intent to conduct a background check and get their consent in writing. If you don’t end up hiring them, you’ll have to allow them to review the background check that was performed. If they find any inaccuracies, they can file a dispute and try to resolve the issue before you can decide not to hire them. With all this complicated legislation, it’s always a good idea to talk with a lawyer or hire one in-house for guidance on these matters.
Separation Of Duties
Separation of duties means that specific tasks require more than one person to be complete. Internal fraud becomes significantly more difficult if tasks related to money, accounts, and checks require several employees to be performed.
For instance, if one employee has the power to both approve payments and write checks, it could be very easy for them to abuse this power. If these duties are divided among several employees, it becomes harder for anyone within that chain of employees to pull off a scam.
It’s also a good idea to introduce a two-person signoff for all online transactions. Any changes to your company’s account details should be processed and approved on the phone or in person. Handling these financial processes by email opens your company up to a greater amount of risk.
Make Daily Deposits and Conduct Monthly Checks
If you’re a retail company or a bar or restaurant that handles high quantities of cash daily, it can be pretty easy for employees to steal money off the top without anyone noticing if your security protocols are not up to snuff.
This is why it’s a good idea to make daily cash deposits, so you never have too much money lying around. Additionally, you should strive to reconcile your bank statements every month. This will let you spot any irregularities and problems quickly, allowing you to stop the fraudsters quickly and avoid significant losses.
You should also be careful with petty cash. This is typically a small amount of funds that a business has on hand to make change or for small purchases that don’t warrant checks or transfers. It’s an easy target for dishonest employees because nobody really pays attention to these funds.
Even though it’s a small amount, consistent theft of petty cash can quickly add up. Thankfully, it’s fairly easy to institute a policy requiring all petty cash transactions to be logged on a regular basis. When the fund needs to be refilled, it should require multiple signatures to avoid any potential tampering. This documentation and organization also make employee theft investigations much easier to conduct.
Consider Investing In Crime Insurance
Having security protocols in place to prevent acts of employee dishonesty is essential. However, when all the measures and procedures fail, you need to have a safety net in place. This is where crime insurance comes into play.
A good commercial crime insurance policy will provide employee dishonesty coverage to protect your business from embezzlement committed by employees, contractors, or other trusted people in your company. It will offer affordable protection for a wide variety of crimes and safeguard your business from potential exposures. An employee dishonesty policy will typically cover the following:
- Theft of money and property by your employees
- Forgery of checks or promissory notes
- Credit or debit card fraud
- Fund transfer schemes
When looking for insurance to protect your business from embezzlement, it’s crucial to work with the right insurance broker to secure the right policy for your unique needs. Working with a dedicated broker that understands your industry enables you to procure the right policy without massively overpaying for it or leaving gaps in your coverage that could leave you open to unnecessary exposures.
If you want to understand how you can transfer the risk of embezzlement to your insurer, feel free to reach out to one of our expert brokers at any time.
Occupational fraud costs the United States over $300 billion per year. Dig into these white-collar crime statistics to learn more.