What is Embezzlement: How Does It Happen


Key Takeaway:

  • Embezzlement is the act of dishonestly withholding assets for the purpose of theft, usually by an employee or trusted individual.
  • Common methods of embezzlement include false invoicing, payroll fraud, and stealing physical assets. Embezzlement can occur in any industry, from finance and healthcare to retail and non-profit organizations.
  • Embezzlement can have serious consequences for both the individual and the organization, including financial loss, legal action, and damage to reputation. Preventing embezzlement requires implementing strong internal controls and oversight, conducting background checks, and promoting a culture of transparency and accountability.

Excruciating financial losses are faced by individuals and businesses due to embezzlement. You may be surprised to know how easily it can occur. Learn what constitutes embezzlement, and how you can protect yourself from this crime.

Embezzlement Defined

Embezzlement refers to the act of illegally taking possession of money or property entrusted to one s care for personal gain. This white-collar crime is usually committed by employees or trusted individuals who have access to sensitive financial information. The offense can occur in different forms and magnitudes, from small-scale embezzlement by low-level employees to multi-million-dollar fraud by executives.

The act of embezzlement involves the deliberate manipulation of financial records, theft of cash, forging of checks, or diversion of funds to personal accounts. The actions are often carried out over an extended period to avoid detection. Embezzlement can have severe consequences on the victims, leading to financial losses, loss of reputation, and legal penalties.

It's essential to note that embezzlement isn't limited to the corporate world but can occur in any setting where one person is entrusted with another person's funds, such as nonprofits and government agencies. Embezzlers often use the stolen funds to finance lavish lifestyles or to pay off debts.

A prime example of embezzlement involves Martha Stewart, an American businesswoman, and television personality, who was convicted of insider trading and lying to investigators. Stewart sold her shares of a biotech company before the stock tanked, following insider information from the company's CEO. She then lied to investigators about her actions, leading to a five-month prison sentence and a two-year probation period.

Embezzlement is a serious offense that can result in severe consequences, and it's critical for individuals and businesses to take the necessary measures to prevent it from occurring. Companies can adopt robust internal controls and audits to detect any potential fraudulent activities, while individuals can avoid entrusting their funds to untrustworthy individuals and maintain proper financial records.

Common Methods of Embezzlement

Common Techniques Used in Embezzlement

Embezzlement is a white collar crime that occurs when an individual misappropriates or steals funds entrusted to them. The following are some frequently used methods in embezzlement:

  1. False Invoicing: Creating fake invoices with realistic details to receive money from the organization.
  2. Cheque Fraud: Writing false cheques, forging signatures or altering legitimate cheques before depositing them.
  3. Skimming: Diverting the organization's funds for personal gains before recording the transaction in the books.
  4. Float Schemes: Stalling checks and using the money before they clear the bank to hide the temporary fund gap.
  5. Payroll : Making fake employees and diverting salary payments or claiming money from the organization as over-time wages.
  6. Cash Larceny: Physical stealing of money from the organization's cash registers or undeposited funds.

In addition to these methods, employees may use several other tactics to avoid detection and misappropriate funds from their employers. Instead of resorting to such unethical practices, an employee should report any fraudulent activities immediately. Encouraging staff to take regular training courses on corporate governance and ethical behavior can help prevent embezzlement. Adequate checks and balances must be implemented to prevent any potential frauds, and auditors must carry out periodic reviews to detect any discrepancies in financial statements.

Embezzlement Examples in Various Industries

Embezzlement Instances in Different Industries: A Comprehensive Look

Embezzlement, a white-collar crime, occurs in numerous industries, including healthcare, finance, and retail. In healthcare, embezzlement often takes place when employees inflate bills or falsify insurance claims to steal money. Finance, on the other hand, sees embezzlement when professionals exploit their access and trust to manipulate financial records or funds. In retail, employees may steal funds by pocketing cash, stealing inventory or merchandise, or manipulating point-of-sale systems.

In addition to the typical industries stated above, embezzlement can also occur in unexpected industries like universities, churches, and government. For instance, embezzlement occurs in universities when qualified employees misuse institutional funds, while in churches, it occurs when the leadership diverts funds for personal gains. Also, in government offices, embezzlement occurs when employees illegally collect funds through corruption.

One true-life example occurred in 2019, when a Mississippi county's deputy tax collector embezzled $4 million in county tax payments over the previous nine years. She would take cash from citizens who paid their taxes in-person, recording the payment as paid without depositing the money into the county accounts, and avoid electronic payments.

Understanding the various methods and industries where embezzlement can occur is critical in preventing and detecting such occurrences. Employers can implement measures such as mandatory background checks, audit trails, and internal controls to prevent employee embezzlement.

Consequences of Embezzlement

Embezzlement s Legal Consequences and the Cost of Restitution

The repercussions of committing embezzlement can be devastating. Not only can this theft offense result in a severe punishment, including heavy fines, imprisonment, community service, and probation, but it can also seriously damage the reputation of the perpetrator. More so, stealing from an employer in any form leads to termination of employment. Additionally, embezzlers must pay restitution to the victim, which may include the cost of investigating the crime, lost income, and any other damages the victim suffered as a result. If the embezzler is unable to repay the restitution, they will face substantial penalties that may ruin their financial future.

Embezzlement in Practice

One such case occurred when an employee at a manufacturing company used the company's account to purchase his own materials for his side business. After six months of fraudulent transactions, the company discovered the embezzlement and immediately fired the employee. The company also pressed charges, resulting in the perpetrator s sentence of 18 months of probation and a hefty restitution payment of $100,000. The employee was also left with a damaged reputation and a bleak financial future. Thus, the severe legal and personal consequences of embezzlement make it an offense that should never be contemplated.

Preventing Embezzlement in the Workplace

Embezzlement is a serious issue that can cause significant damage to a workplace. Preventing financial misconduct can be challenging, but implementing strict policies and safeguards can help. Establishing clear guidelines for financial transactions and hiring trustworthy employees can minimize the risk of embezzlement. Additionally, regular monitoring and audits can detect irregularities before they become major problems. Creating a culture of transparency and accountability is essential to preventing embezzlement.

A notable example of embezzlement is the case of Bernie Madoff, who conducted a Ponzi scheme that defrauded investors of billions of dollars over several decades. It highlights the devastating effects of embezzlement and the importance of taking measures to prevent it.

Legal Action Against Embezzlement

Legal implications of embezzlement can be severe and can lead to imprisonment, fines, and loss of reputation. A thorough investigation is conducted to establish evidence against the perpetrator. A criminal lawyer may be consulted to navigate the legal proceedings. It is important to report any instances of embezzlement to the authorities as soon as possible to prevent further damage.

Steps for Reporting Suspected Embezzlement

First Actions to Report Suspected Embezzlement

When one suspects embezzlement, it is important to act fast and report it in a timely and appropriate manner. Here are the recommended steps to take:

  1. Stop any alleged embezzlement immediately and gather evidence that supports your suspicions.
  2. Notify relevant authorities like the company's managers, police or the FBI and provide them with documented evidence.
  3. Secure any other relevant records or documentation that can help with the investigation.
  4. Cooperate with the investigation and provide them with all necessary information they may need.
  5. Keep confidential and do not discuss this matter with any unauthorized persons or parties.
  6. Seek advice from legal professionals to get protected and know the right steps to follow.

Additional Considerations

In addition to the actions stated above, it is always important to have preventative measures in place. Some suggestions to prevent embezzlement from happening include:

  • Implement internal controls, such as separating financial responsibilities among different employees.
  • Conduct regular audits and reviews of financial transactions to catch irregularities early.
  • Provide training on embezzlement detection and prevention to all employees.
  • Perform background checks during the hiring process to reduce the risk of embezzlement.
  • Keep an open-door policy for employees to report any suspicious behavior, creating a culture of transparency and honesty in the workplace.

By taking prompt action and implementing these preventative measures, businesses can reduce the risk of embezzlement and create a secure and trustworthy work environment.

Five Facts About Embezzlement:

  • ✅ Embezzlement is the act of withholding assets for the purpose of theft. (Source: Legal Dictionary)
  • ✅ Embezzlement can be committed by employees, trustees, or anyone who has been entrusted with access to assets or funds. (Source: FBI)
  • ✅ Embezzlement can occur through the use of fraudulent financial statements, forged checks, or misappropriation of funds. (Source: Investopedia)
  • ✅ Embezzlement is a serious crime that can result in fines, imprisonment, and damage to personal and professional reputations. (Source: FindLaw)
  • ✅ Embezzlement cases often involve complex financial transactions and require the expertise of forensic accountants and other financial investigators. (Source: CNN Money)

FAQs about What Is Embezzlement, And How Does It Happen?

What Is Embezzlement?

Embezzlement is a type of financial fraud where a person steals money or property that they were entrusted with. It is often committed by employees who have access to company funds or assets, but it can also be done by anyone who has been entrusted with someone else's money or property.

How Does Embezzlement Happen?

Embezzlement can happen in a variety of ways, but it usually involves a person taking advantage of their position of trust to steal money or property. Some common methods of embezzlement include altering financial records, forging signatures, and creating fake invoices. Embezzlement can take place over a long period of time or can happen in a single instance.

What Are Some Signs of Embezzlement?

Some signs of embezzlement include missing money or property, unexplained discrepancies in financial records, and unusual or unexplained transactions. Employees who are embezzling often try to cover their tracks by creating false records or by blaming missing funds on accounting errors.

What Are the Consequences of Embezzlement?

Embezzlement is a serious crime that can result in criminal charges, civil lawsuits, and damage to a person's reputation and career. Depending on the amount of money or property that was stolen, a person could face significant fines, imprisonment, or both. Embezzlement can also have long-term consequences, such as difficulty finding employment or obtaining credit.

How Can You Protect Yourself from Embezzlement?

There are several steps you can take to protect yourself from embezzlement, such as implementing internal controls, regularly reviewing financial records, and conducting background checks on employees who will have access to company funds or assets. It's also important to educate yourself and your employees on the signs of embezzlement and to encourage a culture of honesty and accountability in the workplace.

What Should You Do If You Suspect Embezzlement?

If you suspect embezzlement is occurring, it's important to take action immediately. You can start by conducting an investigation and reviewing financial records to look for any signs of suspicious activity. It's also important to consult with a lawyer or other legal professional to determine your options for recovering stolen funds and pursuing criminal or civil charges against the person responsible.