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Learn some of the most common embezzlement schemes, how to spot the red flags in employees, and ways to prevent fraud from harming your organization.

How to Spot and Prevent Embezzlement

Brink's Money

05 Nov 2019

According to the Association of Certified Fraud Examiner’s 2018 Report to the Nations, 85% of fraudsters display behavioral red flags while carrying out their schemes. And yet, embezzlement still occurs, and companies pay dearly for it.

In this article, you will learn some of the most common embezzlement schemes, how to spot the signs in employees, and ways to prevent fraud from harming your organization.

 Common embezzlement schemes  Cash theft

Cash embezzlement plagues B2C businesses, like brick-and-mortar retail stores and restaurants, where cash changes hands frequently. Some common forms of cash theft include:

-Giving customers incorrect change at the register
-Skimming directly from the register during a transaction
-Sneaking cash from tip jars
-Working with an accomplice to refund stolen items for cash
-Withholding cash from a safe or deposit box

 Negotiable documents

Negotiable document embezzlement, or negotiable instrument fraud, refers to the theft of things like checks, credit or debit memos, bonds, money orders, titles, and promissory notes, among other physical documents. Embezzlers forge or alter these official documents, often diverting funds to themselves in circuitous means.

 Expenses, accounts, and payroll

Expenses and payroll are part of every business, small and large. For that reason, these are some of the most vulnerable areas to theft.
-Charging unapproved expenses to a company account, e.g. personal travel and entertainment, gifts, clothing, and the like
-Filing for reimbursements for canceled plane tickets or other expenses that never materialized
-Falsifying receipts
-Conspiring with other employees to bill separately for travel expenses, like filing twice for mileage when they rode together

Criminal employees may also embezzle funds from company and customer accounts directly by: -Altering the company’s accounts or wire transfer instructions
-Manipulating fake, dormant, or inactive customer accounts
-Creating loans or lines of credit to fabricated borrowers
-Authorizing payroll for fictitious employees

 Items and equipment

Outright theft of company property happens in all degrees, from seemingly harmless pocketing of small office supplies to coordinated, large-scale schemes.
-Taking unused or decommissioned equipment, like computers or tools, to be thrown away or recycled and keeping it for personal use, selling it, or having an accomplice pick it up
-Skimming raw materials and scrap from production (common in construction areas and industrial sites)
-Using office supplies and equipment for personal matters, like printing in large quantities without approval or taking stamps for personal letters

 Computer crime

Technology has made tracking patterns and identifying embezzlers a much more streamlined process. But digital systems have also brought about new ways for programmers and operators to commit embezzlement.

-Skimming: Embezzlers steal account details and personal information from databases, which may be used to falsify accounts and transactions or be sold to other identity thieves.
-Trap doors: A minuscule amount of money is shaved off every transaction and transferred to the thief. Trap doors can be difficult to notice within any given transaction but, scaled over thousands or millions of transactions, they can add up to a huge amount stolen.
-Trojan horses: Trojan horse viruses hijack a computer’s existing commands and force programs to perform unauthorized functions (like siphoning money to an embezzler).
-Data diddling: This most often refers to the manipulation of control mechanisms, especially those that detect fraud, so that a thief can cover their tracks.

 Signs of embezzling employees

Most often, your company’s financial metrics will clue you in to embezzlement. The financial signs, however, may not manifest until reports are filed and analyzed. Employee behaviors can sometimes provide an earlier warning, especially if those behaviors shift suddenly.

 A lone employee consistently stays late, works overtime, or takes closing shifts

You may notice that a particular employee is always burning the midnight oil, or that they’re always willing to take the unwanted late shift. This may be generosity or industriousness on the employee’s part, but it could also be a sign of fraudulent activity. When management is away, and no one is around to catch them, embezzlers are free to carry through on their schemes.

 An employee is unwilling to take vacation time

When team members go on vacation, someone else usually steps in temporarily to make sure their work doesn’t fall through the cracks. Employees who never take time off or refuse to may be trying to guard their tracks.

 An employee spends an excessive amount of time with vendors

Time spent with vendors is typically to build relationships and negotiate better pricing. However, if you notice a particular employee spends an inordinate amount of time with a single vendor, they could be accepting kickbacks for facilitating fraud.

 An employee is guarded or withholding about their work

Embezzlers are constantly working to cover their tracks. An employee who is protective of their records or insists on working alone might be trying to hide something.

 An employee shows signs of financial distress

People in desperate situations do desperate things. Financial distress can cause even honest employees to consider any means necessary to alleviate their situation, including theft from your company.

 An employee has sudden or habitual problems with transaction or expense records

Corrupted files, missing receipts, incorrect records, and late expense reports can indicate that an employee is stealing funds or resources, especially if these issues are frequent. Watch out, too, for sudden, consistent issues with otherwise compliant employees.

How to prevent embezzlement

 Create policies and processes

Your first line of defense against embezzlement is your documented policies and processes. Creating clarity on what employees should and shouldn’t do can reduce confusion and help other employees spot and stop bad actors within the company. You should develop, document, communicate, and enforce policies for things like:
-Travel, expenses, and reimbursements
-Opening and handling accounts
-Customer and vendor transactions
-Shipping, receiving, and storage of company assets, including documents, materials, equipment, and supplies

 Implement layered controls and accountability

Fraud often occurs when accountability is concentrated to one employee. Think of a company with a single accountant—without someone else to review records, it might be easy to steal from the company and cook the books. To prevent embezzlement, companies should have strict dual control procedures for financial assets, including money transfers, cash drawers, safes, negotiable instruments, payroll, and purchases. No one person should be solely responsible for handling these assets or their records. Layers of accountability can also include unpredictable changes in routine. For example, an employee starts taking closing shifts consistently. You could assign a different employee to work alongside them or take their place entirely. Other tactics include:
-Conducting unannounced audits and cash counts
-Requiring employees to take periodic, uninterrupted time off
-Randomly rotating shifts, roles, or tasks among team members
Computers and other digital systems present particular risks that dual controls can help reduce. Be sure to document who has access to every system. Create access controls, like shared passwords, that allow multiple employees to log into computers and networks.

 Bring in outside advisors

By nature, embezzlement schemes rely on exploitation of internal systems. Thieves know the ins and outs of your company’s processes and take advantage of any vulnerabilities.

Hired third parties can help you identify and eliminate those vulnerabilities. Outside auditors can also help you identify the signs of embezzlement. They are always a worthy investment. Be careful not to alert your employees that auditors are coming, though, and avoid bringing them in during working hours. If schemers know they’re being watched, they will pause their efforts and hide their tracks more carefully.

 Bolster your expense management

Business expenses are an oft-targeted area for embezzlers. Expenses that are managed with petty cash or reimbursement processes are particularly vulnerable to manipulation and theft.

Prevention begins with a strong policy, but a business’s routine expense management can benefit greatly from implementing a business expense card. Cards offer a degree of control over funds that keep embezzlers at bay. This is especially true of business debit cards, like Brink’s Business Expense, that allow companies to assign precise budgets to cards and projects.

Cards also grant additional transparency. Transaction records aren’t reliant on self-reporting and can be accessed in real-time. Custom alerts allow account holders to identify and quell fraudulent activities with just a few clicks. Interested in learning more? Let’s chat.

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