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About the Author
Kelly Paxton has more than 13 years of law enforcement experience. Kelly is a Certified Fraud Examiner, Private Investigator and Social Media Intelligence Analyst. Kelly started her career in law enforcement as a Special Agent for US Customs Office of Investigations in 1993. She was recruited by US Customs for her expertise in finance. She worked white collar fraud, money laundering and narcotics cases. She also was responsible for the district’s undercover operations and financial reporting of these operations. Kelly worked as a contract investigator doing over 1000 security background investigations for the Office of Personnel Management and Department of Homeland Security. Kelly has worked in the public and private sector. Her investigations include embezzlement, conflict of interest, intellectual property, Open Source Intelligence and fraud. Kelly is also the proud owner of pinkcollarcrime.com, a passion of hers about embezzlers in the workplace.

How to Protect Your Organization from Embezzlement

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Embezzlement. It’s one of those “it could never happen to me” crimes. But sadly, it’s much more prevalent than most business owners realize. I’m going to explain why every business owner needs to have embezzlement on their radar – because if you have assets, you’re at risk. I’ll also share some crucial guidelines to help prevent and address this threat.

 

What is embezzlement, and how common is it?

 

Embezzlement is the theft of assets from an employer or organization that has entrusted a person with those assets. The sad truth is that it can happen to any company or organization, of any size. Whether you’re a dentist, small business owner, or municipal agency, you’re at risk.

 

That said, nonprofits tend to be especially hard-hit. These types of organizations typically pay lower salaries and have less segregation of duties. Nonprofit leaders may also be reluctant to report fraud out of fear of losing donor money.

And although women embezzle less money overall than men, more women than men are arrested for embezzlement – a phenomenon known as pink collar crime. That’s because more women tend to occupy money-handling positions, such as bookkeeping and accounting, especially during the past 30 years.

 

The challenges of preventing and resolving embezzlement

 

It’s not easy to prevent embezzlement. Three main factors influence whether a person will commit this crime: opportunity, pressure, and rationalization. There is very little you can do about pressure and rationalization – even if you pay an employee US$1 million a year, if they have a $2 million lifestyle, they may feel pressure to steal. As a business owner, you only have influence over opportunity.

 

It’s also hard to identify and catch embezzlers. After all, there’s no “dead body.” In fact, most cases are not detected by internal accountants or auditors. That’s because audits typically take a test and sample approach, and they only flag amounts considered material. If someone steals $100,000 from a large corporation with $100 million in annual revenue, that amount may not raise a flag even if it’s detected.

 

Beyond the challenges of preventing and identifying embezzlement, resolving a case can be an even higher mountain to climb. Law enforcement may deprioritize these cases in favor of crimes they consider more urgent. And many embezzlement cases are never even reported to authorities. This is often due to shame and embarrassment (or even fear of extortion) on the part of the business owner.

 

And if the business owner does report the crime and decide to pursue justice, the financial costs can be significant. Attorney and other professional fees, including hiring a fraud examiner and computer forensics specialist, add up quickly. And these costs may not be worth the questionable benefit.

 

How to keep your business safe from embezzlement

 

Despite the challenges, when it comes to embezzlement, an ounce of prevention is worth a pound of cure.

 

The first step is to create a psychologically safe work environment. Employees are more likely to blow the whistle if they believe they’ll be supported. If they fear retaliation, they won’t.

 

Next, it goes without saying that you should run an ethical business so a potential embezzler has no leverage to use against you. You can't expect employees to behave well if you don’t set the tone at the top.

 

Along with creating a company culture that discourages embezzlement, you can take some practical steps to reduce your risk:

 

  • Mail bank statements to your home or a mailbox you control and obtain copies of business checks after they’ve been cashed. That way, you can ensure your money is going where it should.
  • Make sure employees take vacations – not just two or three day “micro-cations,” but at least a week at a time. This ensures that someone has to cover for them, making it easier to uncover fraudulent activity.
  • Segregate duties. Make sure the person who opens the mail isn’t the one who deposits checks or manages the accounting system.
  • Look for outliers in your payment systems. If you typically pay vendors on day 29 but have one vendor who always gets paid on day 5, that’s a red flag.
  • Keep an eye out for obvious signs that your employees’ lifestyles no longer match their salaries. If an employee suddenly starts driving an expensive car, it may be reason to dig deeper.

What to do if you discover an embezzlement

 

If you find you’ve been embezzled, your first step is to not panic. Your second step is to call your attorney. Your next step is to call your insurance company – and hopefully you have employee dishonesty coverage. Don’t act rashly and fire the person you suspect of embezzling before talking to your attorney and coming up with a better plan (such as suspension during the investigation). A false accusation could lead to a lawsuit and much bigger financial losses and headaches.

 

Once you’ve contacted your attorney and insurance company, start assembling the rest of your fraud team. This includes a private investigator, a forensic accountant, law enforcement, and your insurance company. Your insurance company may also require you to file a police report before filing a claim.

 

You should also consider hiring a therapist. Embezzlement is not a victimless crime, especially if the perpetrator was someone you knew and trusted. The emotional toll can be significant.

 

I always tell my clients that the best thing they can do is get back to work. Your money is replaceable, but you’ll never get back the time you lose not focusing on your business. At the same time, you have time. Proceed calmly and know that the fallout won’t be cleared up overnight. It may take law enforcement a while to prioritize your case. And you may have to redo your financial statements and even your taxes.

 

Since embezzlement is so misunderstood, I’ve spoken with many business owners reluctant to believe they’re at risk. That’s why I usually share a simple rule of thumb: “If you have money, it can happen to you.”