Part of your job as a business owner is to track and protect your company resources. This includes looking for signs of embezzlement or employee theft. To do this effectively, it helps to know the various types of embezzlement that are common in small businesses. Read on for a full list of examples of embezzlement.
What Is Embezzlement?
Embezzlement is the misuse or theft of company funds or company property. There are a variety of ways that an employee or business owner can steal or misappropriate resources, which you can see in the list below.
How Does Embezzlement Happen?
Embezzlement occurs when an employee or business owner steals or misappropriates company funds. For example, an employee may accept payment for a transaction without placing funds in the company bank account. See the list below for more embezzlement examples.
Common Examples of Embezzlement and Employee Theft
Embezzlement refers to a wide range of actions where employees or decision makers steal or misuse company resources. To protect your small business, here are several examples of embezzlement to know. And if you’ve ever wondered, “How do I handle embezzlement and employee theft?” you can also find tips under each example.
1. Voiding Transactions at the Cash Register
When an employee enters a transaction and collects money, they may then void the transaction and keep the money for themselves. This can be difficult to detect, because the system should balance out, but the customer still received their product or service, and your company doesn’t receive the funds.
Prevention: Many modern point of sale systems have settings that require a supervisor or manager’s approval to void a sale. Upgrade your system or enact this feature to avoid giving employees this opportunity.
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2. Pocketing Cash Payments from Fundraisers
If your business or organization hosts fundraisers, you may collect donations that aren’t counted right away. If just one worker has access to these funds before they’re appropriated, they may collect some for themselves.
Prevention: Have more than one employee in charge of collecting and counting funds.
3. Cashing Customer Checks
An employee may set up a bank account with a name similar to the company. Then they can cash customer checks or divert electronic payments into their account instead of the company’s.
Prevention: This crime is most common where one employee is responsible for both collecting payments and keeping track of accounting records. Separate responsibilities so there are multiple people who can catch potential issues.
4. Overbilling Customers
An employee may charge customers more than your company’s rate for a certain product or service, or add on extra fees and pocket the extra money.
Prevention: Conduct periodic audits of customer billing practices, and look into customer complaints surrounding billing or extra fees.
5. Forging Payments
An employee may write checks to themselves or transfer funds from the employee bank account if they have access to your information and signature. They may then create fraudulent accounting entries to cover up these payments.
Prevention: Avoid giving access to your electronic signature, and audit expense payments to catch any oddities.
6. Faking Vendor Payments
An employee may set up fake vendor accounts or edit accounting entries to make it seem like payments are being made to vendors. But then they send that money to themselves.
Prevention: Review all payments to vendors periodically, or have more than one worker check your entries.
7. Stealing Customer Credit Card Data
Employees who collect customer credit card data to complete purchases may then record the numbers to use for their own purchases. This is stealing directly from customers and can lead to lack of trust for your business.
Prevention: Use payment software that redacts the full credit card number and avoid taking information manually unless absolutely necessary.
8. Double Dipping
Employees may collect extra money from your expense account by first charging the expense to their company credit card and then requesting reimbursement funds as if they paid for it themselves.
Prevention: Separate responsibilities so other employees can check if an expense has already been covered. Expense management software can streamline this process.
9. Misusing an Expense Account
Employees may also request reimbursement for expenses that aren’t related to company functions. For example, they may try to get a personal lunch covered, even if they weren’t meeting with a client.
Prevention: Create a clear policy of what is and isn’t covered. Then use expense management software to collect data and receipts.
10. Misusing Employee Discounts
If a store or restaurant offers discounts only to employees, some may attempt to offer those privileges to friends, family, or others.
Prevention: Create a strict policy regarding who can and cannot use these discounts. Check on excessive purchases made by any employee.
11. Stealing Cash
Employees with sole access to cash may take small amounts, hoping they won’t be noticed. However, these small increments can add up over time.
Prevention: This theft often occurs when one employee is responsible for county money or making bank deposits. There are many cash-handling best practices your business should follow to avoid this, including having more than one person complete these deposits.
12. Stealing Office Supplies
An employee may steal supplies from your storage area and bring them home or even sell them.
Prevention: Keep only small amounts of supplies accessible at one time. Or have employees request when they need more of a particular item.
13. Stealing Equipment
Equipment often includes larger items like computers or tech. Employees may take these items home or sell them for cash.
Prevention: Have employees sign out large devices, or require that they remain in the office.
More Embezzlement Examples to Know
Embezzlement refers to a huge range of actions that employees or decision makers take for personal gain. Here are even more examples of embezzlement for business owners to know.
14. Selling Trade Secrets – Corporate Espionage
This type of embezzlement occurs when an employee sells proprietary information to a competitor.
Prevention: Only give access to information that is essential for each person’s roles. Use secure storage for important data, and track who has access.
15. Using a Company Credit Card for Personal Use
If your employees have access to company credit cards, using them for personal purchases may qualify as embezzlement.
Prevention: Set clear rules for credit card usage and review purchases regularly.
16. Burglarizing Your Location
Employees who have inside knowledge about your location, like alarm codes or locations of valuables, may participate in burglaries.
Prevention: Use security cameras and alarms, and carefully track who has access to sensitive information.
17. Stealing Merchandise
Retail employees may steal physical products off the shelves or take items that have recently been returned:
Prevention: Set strong inventory and returns practices, and use security cameras to monitor activity.
18. Claiming Lost Equipment
An employee claims a laptop or other equipment was stolen. They get a new one and keep the old one or give it to a family member.
Prevention: Use software to track the location of company devices or disable them if they’re lost or stolen.
19. Creating Ghost Employees
Employees that control your payroll may set up new employees that don’t exist. They “pay” these fake employees and keep the money for themselves.
Prevention: Regularly review payroll documents and compare them to employee records. This is also a top reason why payroll is one function you should outsource to a reputable provider.
20. Stealing Tax Funds
Employees responsible for tax payments may keep that money for themselves. Not only are those funds missing, but you’ll also be on the hook for a larger tax bill.
Prevention: Audit your tax practices regularly or outsource this function to a reputable tax service.
21. Collecting Kickbacks
Kickbacks are payments from vendors to employees in exchange for your company’s business or other perks.
Prevention: There are many ways to better manage your accounts payables and accounts receivables. Start by choosing vendors yourself or create a committee to make these decisions.
22. Identity Theft
This type of embezzlement occurs when an employee uses your business name to open credit cards or take out loans to use for their own purchases.
Prevention: Regularly check your company’s accounts and credit score to note any irregularities.
23. Using Company Resources to Start a Business
If an employee uses company time, equipment, or funds to start their own business without your knowledge, that qualifies as embezzlement.
Prevention: Set clear rules about how company resources are to be used.
24. Ponzi Schemes
A ponzi scheme occurs when a company or individual promises high returns to investors or stakeholders but pays them with money from new investors instead of with the product or service the company claims to provide. This type of scheme is most common in financial management and retirement planning businesses.
Prevention: Track how money is brought in and where it goes. If working with investors, be completely transparent about the origins of funds.
25. Falsifying Business Records
Many forms of embezzlement involve falsifying business records to cover up the misappropriation of funds or to defraud investors.
Prevention: Find a reputable bookkeeping company to outsource these tasks to, and audit your records and finances periodically.
26. Padding Expense Reports
Employees may exaggerate or invent expenses on their expense reports to receive higher reimbursements.
Prevention: Implement strict guidelines for expense reporting, require original receipts for all claims, and routinely audit expense reports.
27. Unauthorized Overtime Claims
An employee might claim overtime hours they did not work to receive extra pay.
Prevention: Use automated time-tracking systems and require managerial approval for all overtime hours.
28. Diverting Customer Refunds
Employees might process refunds for non-existent customer returns and divert the refund to themselves.
Prevention: Implement strict controls over refund processing, including managerial approvals and routine audits of refund transactions.
29. Phantom Supplier Payments
Creating fake supplier accounts or invoices and then authorizing payments to these accounts, which are actually controlled by the employee.
Prevention: Regularly review vendor lists and invoices, and verify new suppliers through multiple channels.
30. Tampering with Payroll Records
Altering payroll records to increase one’s salary or wages without authorization.
Prevention: Limit access to payroll systems and conduct regular audits of payroll records.
31. Unauthorized Commission Claims
Claiming commission for sales or deals that were never completed or exaggerating the value of sales to receive higher commissions.
Prevention: Verify all commission claims with actual sales data and require managerial approval for commission payouts.
32. Illegal Use of Intellectual Property
Employees may use the company’s intellectual property, such as patented processes or trade secrets, for personal gain or share them with outside parties.
Prevention: Securely store and monitor access to sensitive information, and educate employees on intellectual property laws.
33. Skimming from Cash Receipts
Taking a portion of cash from sales or receipts before they are recorded in the accounting system.
Prevention: Implement strict cash handling procedures and conduct surprise cash counts.
34. Abusing Employee Benefits
Manipulating or misusing company-provided benefits, like insurance, for personal gain.
Prevention: Regularly review benefit claims and usage, and conduct audits if necessary.
35. Selling Company Assets for Personal Profit
The last of our embezzlement examples is unauthorized selling of company assets such as equipment or inventory and keeping the proceeds.
Prevention: Keep a rigorous inventory and asset management system, and require multiple approvals for asset disposals.
Is Embezzlement a White Collar Crime?
Yes, embezzlement is one of the most common white-collar crimes. The severity and type of charge can vary widely, but it is generally considered to be a form of theft or fraud.
What Is the Punishment for Embezzlement?
The type of criminal charges one might face for embezzlement can vary widely based on the situation and the amount of money or resources that were stolen or misused. Laws also vary by state. Minor embezzlement charges are often considered misdemeanors, which may involve fines or jail time. Felony embezzlement may include serious prison sentences of up to 15 years.
Can You Embezzle from Your Own Company?
Embezzlement occurs when funds or resources from a business are misused for personal gain. If you are the sole owner of your business, you generally cannot be charged with embezzlement, as you’re the owner of those resources. However, if your company is part of a partnership or has multiple stakeholders, your misuse of funds could be considered fraud.
Preventing and Detecting Embezzlement in Your Small Business
Preventing and detecting embezzlement in your small business is crucial for protecting your company’s financial health and reputation. As a business owner, it’s essential to implement measures that can safeguard your business from internal theft. Here are some strategies to consider:
- Implement Internal Controls: Segregate Duties: Separate responsibilities among different employees to ensure that no single individual has access to all aspects of financial transactions. This helps prevent any single person from manipulating or misusing company funds.
- Regular Audits: Conduct regular internal audits of your financial records to identify any discrepancies or irregularities. Audits can help catch potential embezzlement early on and deter employees from engaging in fraudulent activities.
- Check Signatures: Limit access to your signature and ensure that you personally review and approve all significant financial transactions. By personally approving such transactions, you can prevent unauthorized disbursements.
- Promote Transparency: Encourage Reporting: Foster an environment where employees feel comfortable reporting suspicious activities or raising concerns about potential embezzlement. Encouraging reporting can help you detect embezzlement at an early stage.
- Whistleblower Policy: Establish a confidential whistleblower policy that allows employees to report misconduct anonymously. Whistleblower protection can encourage employees to come forward with information without fear of retaliation.
- Educate Employees: Training Programs: Provide regular training to employees about company policies, ethical conduct, and the consequences of embezzlement. Educating employees about the seriousness of embezzlement can deter such behavior.
- Emphasize Consequences: Make employees aware of the legal repercussions and disciplinary actions that result from committing embezzlement. Clearly communicate the penalties for embezzlement to deter potential offenders.
- Monitor Financial Data: Use Accounting Software: Invest in reliable accounting software that can track financial transactions and generate reports for review. Accounting software can help you monitor financial activities and identify suspicious transactions.
- Bank Reconciliations: Regularly reconcile bank statements with accounting records to spot any unauthorized transactions. Reconciling bank statements can help detect discrepancies and potential embezzlement.
- Conduct Background Checks: Thoroughly vet all potential employees, especially those who will have access to financial data or handle cash. Background checks can help identify candidates with a history of dishonesty or financial misconduct.
- Secure Digital Information: Password Protection: Require strong passwords for all company systems and change them regularly. Strong password protection can help prevent unauthorized access to sensitive financial information.
- Restrict Access: Grant access to sensitive information only to authorized personnel on a need-to-know basis. Limiting access reduces the number of individuals with access to critical financial data.
- Establish a Code of Conduct: Code of Ethics: Develop and distribute a code of conduct that outlines expected behavior and ethical standards for all employees. A code of ethics sets clear expectations and reinforces the importance of integrity in the workplace.
- Set Clear Policies: Expense Policy: Clearly define what expenses are reimbursable and set limits on employee spending. An explicit expense policy can prevent employees from abusing company funds.
- Vendor Management: Establish a robust vendor management process to prevent fraudulent vendor schemes. Vet vendors carefully and regularly review vendor transactions.
- Monitor Inventory: Regular Inventory Checks: Conduct routine inventory checks to ensure that physical assets match recorded inventory. Regular inventory checks can help identify any missing or misused assets.
- Encourage Oversight: Management Review: Require management to review and approve financial transactions regularly. Having multiple levels of approval can deter fraudulent activities.
- External Audit: Consider hiring external auditors to conduct periodic audits for an unbiased assessment. External auditors can provide an independent evaluation of your company’s financial practices.
|Implement Internal Controls
|- Segregate Duties: Separate responsibilities among employees to prevent single individuals from accessing all financial transactions. - Regular Audits: Conduct internal audits to identify discrepancies and deter fraudulent activities. - Check Signatures: Limit access to your signature and personally approve significant financial transactions.
|- Encourage Reporting: Foster an environment where employees can report suspicious activities or concerns about embezzlement. - Whistleblower Policy: Establish a confidential policy allowing anonymous reporting of misconduct.
|- Training Programs: Provide regular training on company policies, ethical conduct, and the consequences of embezzlement. - Emphasize Consequences: Make employees aware of the legal repercussions and disciplinary actions for embezzlement.
|Monitor Financial Data
|- Use Accounting Software: Invest in reliable software to track financial transactions and generate reviewable reports. - Bank Reconciliations: Regularly reconcile bank statements to detect unauthorized transactions.
|Conduct Background Checks
|- Thoroughly Vet Employees: Screen potential employees, especially those with access to financial data or handling cash.
|Secure Digital Information
|- Password Protection: Implement strong password requirements and regular changes for company systems. - Restrict Access: Limit sensitive information access to authorized personnel on a need-to-know basis.
|Establish a Code of Conduct
|- Code of Ethics: Develop and distribute a code of conduct outlining expected behavior and ethical standards for all employees.
|Set Clear Policies
|- Expense Policy: Clearly define reimbursable expenses and set limits on employee spending. - Vendor Management: Establish a process to vet vendors and regularly review vendor transactions for potential fraudulent schemes.
|- Regular Inventory Checks: Conduct routine checks to match physical assets with recorded inventory.
|- Management Review: Require management to regularly review and approve financial transactions. - External Audit: Consider hiring external auditors for unbiased assessment and validation of financial practices.
By proactively implementing these preventive measures and fostering a culture of integrity and transparency, you can significantly reduce the risk of falling victim to these embezzlement examples in your small business. Being vigilant and proactive is essential to safeguard your company’s resources and maintain the trust of customers, employees, and stakeholders.
As a business owner, the responsibility of tracking and protecting your company’s resources is paramount. Embezzlement, the misuse or theft of company funds and property, poses a significant threat to your business’s financial health and reputation. To effectively combat this threat, it is crucial to be aware of the various ways in which embezzlement can occur.
The embezzlement examples provided here illustrate the diverse methods that employees or decision-makers may employ to misappropriate resources for personal gain. From voiding transactions at the cash register to misusing expense accounts or engaging in corporate espionage, embezzlement can take many forms.
Preventing and detecting embezzlement requires proactive measures and a culture of transparency and integrity within your organization. Implementing internal controls, conducting regular audits, and promoting transparency by encouraging reporting and establishing whistleblower policies are essential steps in safeguarding your business.
Educating employees about the consequences of embezzlement and emphasizing the importance of ethical conduct can serve as powerful deterrents. Additionally, monitoring financial data through reliable accounting software, conducting background checks on potential employees, and securing digital information are essential strategies to protect against embezzlement.
By setting clear policies, conducting regular inventory checks, and encouraging oversight through management reviews and external audits, you can further reduce the risk of embezzlement in your business.
Embezzlement is a white-collar crime that can lead to severe legal consequences, including fines and imprisonment. As a business owner, it is crucial to understand the gravity of this offense and take all necessary steps to prevent it from occurring within your organization.
By diligently implementing the preventive measures and strategies outlined here, you can fortify your small business against the threat of embezzlement and uphold the trust of your customers, employees, and stakeholders. Safeguarding your company’s resources is not only a legal obligation but also essential for the long-term success and prosperity of your business.