Embezzlement – Are You Vulnerable?

Jeff Robinson

July 7, 2015

Considerations for for-profits and not-for-profits alike...

According to one online dictionary citing Webster’s, embezzlement is defined as “The act of fraudulently appropriating to one’s own use, the money or goods entrusted to one’s care and management.”  Embezzlement differs from certain other types of theft in that the person committing the act was “entrusted” with the care of the money or goods.  They did not have to commit a criminal act to obtain access to the money or goods.

Google the word embezzlement along with your city or state and a year and any number of articles will appear of both alleged and confirmed cases of embezzlement.  This week in Richmond, Virginia, there is a story involving allegations of embezzlement spanning a number of years by a trusted employee for hundreds of thousands of dollars.  This story involves a for-profit medical practice.  Unfortunately, it is just as likely to find a similar story for a not-for-profit organization or charity.  These stories are reported in good economic times and in bad and often involve people and organizations that you would never expect to experience an incident of embezzlement.

Are you vulnerable?  The Association of Certified Fraud Examiners website discusses “The Fraud Triangle” which originated from the hypothesis of Donald R. Cressey in his 1972 book, Other People’s Money.  The conditions included in The Fraud Triangle are:

  1. Outside pressures – examples would include financial difficulties at home, medical issues or addictions which are viewed as non-shareable and lead to stealing
  2. Opportunity – individuals experiencing the types of outside pressures above who are in a position of authority to act and ultimately to commit fraud
  3. Rationalization – individuals experiencing an outside pressure with the opportunity to access funds may believe they are not being fairly compensated and deserve the funds or may rationalize that they are only “borrowing” the money and have the intent to repay but never do

While no one action will fully protect your organization from embezzlement and it is difficult, if not impossible, to fully eliminate the risks, there are steps you can consider to reduce your risk.  It may be difficult to recognize either outside pressures or rationalizations but steps can be taken to reduce opportunity.  Some of these steps would include:

  1. Review and update your risk assessments to identify and mitigate embezzlement risks
  2. Ensure that you have a segregation of duties for your staff separating custody of assets from the authority to initiate transactions and record the activity in your books and records
  3. Review the business processes you have in place
  4. Perform background checks but understand the limitations of the report you are using (our payroll solutions sister company, Payroll Vault, offers an optional service for clients seeking this service)
  5. Implement a whistleblower system encouraging internal reporting
  6. Provide employee assistance programs giving an option for your employee to seek help prior to turning to embezzlement
  7. Educate your employees on your organization’s values
  8. Maintain a Code of Ethics and provide ongoing ethics training
  9. Reduce independent work units to minimize autonomous behavior
  10. Mandate a vacation policy
  11. Initiate a task rotation structure supported by appropriate cross-training programs

There are numerous considerations to evaluate in your effort to reduce the risk of embezzlement.  Each organization needs to consider its options while considering their size, budget and operational opportunities.  It is also important to realize that these efforts are not a one-time exercise but require ongoing evaluation as facts and circumstances will evolve over time.

As always, please let us know if we can be of assistance to you or your organization related to this article or the other accounting, bookkeeping, payroll, bill payment, tax compliance or related business advisory needs you are experiencing.

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