Knowledge Center — Fraud Awareness & Prevention

Safeguarding your Business Against Employee Embezzlement

Safeguarding Your Business Against Employee Embezzlement

To prevent employee theft, businesses must take steps to minimize opportunity for it to occur, increase employee accountability and establish a strong culture of integrity.

Employee theft, particularly embezzlement, is a serious concern for businesses of all sizes and industries. Embezzlement occurs when an employee misappropriates company funds or assets for personal use. It can be difficult to detect, and it can do significant financial and reputational harm to a business.

According to a 2018 embezzlement study by business insurance provider Hiscox, businesses with fewer than 500 employees were the most vulnerable to embezzlement, and the average loss per embezzlement case was $357,650. Further, the average scheme lasted more than two years and was often carried out by more than one employee. More than half the companies recovered less than a third of what was taken. Even more alarming, the report revealed that damage to the companies studied reached beyond financial loss: Some also lost customers and business partners as a result of the reputational hit that followed.

Factors Contributing to Employee Embezzlement

Several factors can contribute to employee theft, including:

  • Employee financial pressures (e.g., high debt, unmanageable living expenses, a financial crisis).
  • Inadequate internal controls, leading to opportunities for employees to steal without being caught.
  • Employee job dissatisfaction, a sense of entitlement or a belief they are underpaid or undervalued—all can contribute to employees rationalizing theft of money or inventory.
  • Lax screening of job candidates.

Warning Signs of Employee Embezzlement

Numerous warning signs can tip employers to the possibility that embezzlement is occurring in their company. Some of the most common include:

  • Unexplained discrepancies in financial records and/or missing records or receipts.
  • Changes in an employee’s behavior or lifestyle, such as living beyond their means.
  • Employees who are unwilling to take vacations or have others check their work.
  • Unusual patterns of behavior (e.g., arriving early or working late).
  • Employees who are secretive, defensive or resist feedback or criticism.

Types of Embezzlement

One of the characteristics that makes embezzlement so insidious is that it can take many different forms. Employers must be constantly vigilant. Here are some of the most common forms of embezzlement:

  • Skimming is a scheme in which an employee takes cash from a business before it is recorded in the accounting system.
  • Billing fraud involves an employee creating false invoices or altering existing invoices to steal money.
  • Payroll fraud occurs when an employee creates fake employees or alters timesheets to divert money to themselves.
  • Check fraud takes place when an employee writes checks to themselves or to fictitious vendors for personal gain.
  • Expense reimbursement fraud occurs when an employee submits a claim for reimbursement of fictitious or inflated business expenses.

Preventing Embezzlement

Safeguarding against embezzlement requires a multifaceted approach that includes strong internal controls, employee education and regular monitoring. Some safeguards businesses can implement to prevent employee embezzlement include the following:

  1. Conducting thorough background checks (i.e., criminal history and credit checks) on all employees before hiring can help businesses identify candidates with a history of theft or fraud.
  2. Establishing and implementing strong internal controls safeguards against individual employees having too much control over financial transactions or access to funds. Businesses should consider requiring multiple signatures for transactions over a certain dollar amount, implementing a separation of duties and regularly reviewing financial records. Some businesses even employ physical security measures such as installing surveillance cameras and implementing physical access controls.
  3. Training employees on internal controls and the consequences of embezzlement and employee theft not only can help deter potential theft but also can reinforce a culture of honesty and integrity in the workplace.
  4. Conducting regular audits, including regular reviews of financial records and transactions can help businesses identify unusual activity and detect potential embezzlement before it becomes a significant problem. Audits can also help identify weaknesses in internal controls that must be addressed.
  5. Utilizing the tools Country Club Bank provides, including dual control, notifications that alert you to specific transactions, and audit reports that can be pulled to monitor changes users make. Please talk with your Country Club Bank representative about these tools and other best practices to help you safeguard your business against employee theft.