Embezzlement occurs when an individual is entrusted with assets that they misappropriate or steal for their own benefit. The individual has access to assets and uses it to take control of properties that are not their own and possess them illegally. Embezzlement happens without consent and it is a form of white-collar crime as there is the intention to misuse the money or property.
The embezzler may be acting alone or with a partner who is helping them with their illegal activities. The size of embezzlement varies, it could be something small or something that could be detrimental to the financial health of a business. Embezzlement can be a scheme that was planned out over a period of time and was well thought out.
There are situations where embezzlement might go unnoticed and is considered unethical regardless of the impact it has. It is a type of fraud that can be hard to prove as the embezzler takes advantage of the person who trusts them with the assets. They might be oblivious to the employee’s actions as they do not see them in a negative light. The success or the duration of the activities relies on the amount of trust that has been built and the scale of embezzlement.
Difference between embezzlement and theft
Embezzlement can count as a type of theft. However, the main difference between the two is that embezzlement involves an individual misappropriating assets in their possession that they have been entrusted with. The owner of the assets willingly gave access to the embezzler. On the other hand, theft involves the individual stealing assets from the owner while the owner has direct possession of them.
The owner never planned for the thief to handle their assets or use them in any way. However, the embezzler was entrusted with the assets for a certain purpose. They might have a financial responsibility. Theft might be easier to detect as the asset was in the possession of the owner.
Embezzlement can have a greater impact than theft. For example, the possessor probably thought highly of the person, highly enough to entrust them with their property or money. If they commit a crime against them, it breaches their trust and negatively affects their financial situation.
Types of embezzlement and examples
Cash skimming is also referred to as syphoning. It involves money being taken before the money is recorded in the accounting system of a business. It is never reported and therefore can be hard to identify. It is a very simple type of embezzlement as the employee removes the cash before it enters the books and employers can struggle to prove it.
Cash skimming is most common in retail or hospitality, where cash handling is involved. The employee might not record a purchase and pocket the money for themselves before it enters the register. By not entering the purchase into the system they do not have to count it into the total revenue at the end of the day and employers can only have suspicions but no proof.
Lapping occurs when payments of customers are continuously allocated to cover the theft of funds. Newer payments are used to cover older ones so there are no discrepancies. The employee is usually responsible for accounts receivables and tries to hide potential debts that might occur by their embezzlement. Smaller businesses might be exposed to this type of activity if they only have one person responsible for finances.
For example, a worker in a firm might receive a payment for a service and take it for themselves. The second payment they receive will be used to cover the absence of the first payment and the third payment will cover the second.
This is a more recent type of embezzlement. It is a cybercrime that involves an employee changing money transactions and business data to allow them to steal money without anyone noticing. They might change customer information and cause unapproved transactions to occur. They might also remove money from transactions electronically.
An employee could also launch programs or viruses that will provide them with the necessary information to commit another fraud or improve their current scheme. The person who has access to computer systems and client information can commit more than one crime, potentially even identity or password theft. Other data within the company might also be at risk.
This occurs when an employee receives an illegal benefit for giving preferential treatment. It usually takes the form of an employee who is responsible for purchases or bookkeeping favouring a certain supplier or vendor because they have an agreement. The agreement helps the personal interests of the employee but not the benefit of the business. A ‘’kickback’’ might also be given to an employee who is trusted within the company, to influence the decision-making of the business.
The employee misappropriates the funds of the business by not making favourable decisions even though they are trusted to do so. A recent example of a kickback was in 2021, when a former Netflix executive was convicted of fraud, bribery and kickbacks. Any business is vulnerable when it comes to embezzlement, regardless of its services or size.
Employers pay extra for overtime, so employees might take advantage of this and submit additional hours. They might clock into work early or clock out late to falsify the timesheets and earn more money for hours they have not worked for. A former police officer plead guilty in 2021 to committing overtime embezzlement and receiving money he had not earned legally.
Businesses trust employees with their funds by letting them be responsible for their working hours’ records. Exploiting their trust is a crime punishable by law. Employees have to be truthful when recording their hours.
How to prevent embezzlement
Different types of embezzlement will require different prevention strategies. It is always recommended to adopt a proactive rather than a reactive approach. To prevent cases of lapping, businesses might choose to allocate accounting responsibilities to more than one employee. This way more people will be able to check the records and identify if there is suspicious movement. Employees will also be less tempted to embezzle money as they will have a greater fear of being found out.
Training employees can prevent all types of embezzlement as employees will be familiar with detecting wrongful activity and will be able to report it. It will also inform workers of the systems that are in place that monitor financial information which could discourage potential embezzlement from occurring in the future. If policies are enforced, individuals will know that the company is taking compliance seriously and is aware of issues that might exist in the workplace. A zero-tolerance policy should be implemented regarding all types of fraud.
To deal with cash skimming businesses might choose to limit the amount of cash that is in the business. They might opt for card-only payments or install surveillance to monitor suspicious activity.
Limiting the access of employees to data and financial information can prevent computer embezzlement. Employers might choose to monitor the workers or reduce their permissions and responsibilities. Experts or software might be needed to prevent a potential virus attack.
Performing internal and external audits is necessary, especially if managers suspect fraud or have seen signs of embezzlement. Audits can be conducted as part of a regular schedule or randomly and should always be objective.
Consequences of embezzlement
Embezzlement has a negative impact on both the employer and the employee. For the employer, it could lead to losses, reduced revenue and data theft. It could influence the business’s reputation among customers and society and could discourage consumers from becoming their clients. It could potentially lead to business failure depending on the severity of the scheme.
Penalties vary by country, city and state. They could take the form of fines or imprisonment but the punishment relies on the size of embezzlement, the type and the damage it has caused. The consequences of embezzlement do not only affect the embezzler in the present but also in the future. The individual might struggle to find a job if they have been found guilty. They could also affect their families as well.
Consequences could also be affected by the defences. There might be insufficient evidence that could cause the criminal charges to be dropped or there might not be an intent to commit embezzlement.
Embezzlement is an illegal activity that affects businesses regardless of size or industry. There are many types of embezzlement so businesses need to be prepared to avoid the potential consequences. Preventing the crime is crucial for business survival, minimising the threat and reducing the chances of a similar event happening in the future. Sometimes it can go unnoticed or it can be hard to prove so employers should have enough evidence before pressing charges or pointing fingers.
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