Businesses of all sizes deal with varying degrees of theft and fraud. One of the most common types of fraud impacting businesses is embezzlement and the many cases are committed by employees of the impacted company. Nearly all companies face a reality of minor theft, like a few office supplies or some food here and there. When the fraud rises to the level of embezzlement, how companies respond will often determine whether the company survives. Because theft of company funds or assets can put the entire business in jeopardy, we wanted to share a breakdown of common warning signs of embezzlement and what your company should do if you suspect it has occurred.
Common Types of Embezzlement
Embezzlement is generally defined as any kind of theft or misuse of company funds or assets. It can be committed by contractors, employees, shareholders and owner/operators of a business. The first step to preventing future incidents or spotting current cases of embezzlement against your company is understanding the most common ways that it is perpetrated. Here are five of the most common types:
1) Fake Suppliers
Approved outside suppliers and vendors that are simply shell companies, if they even exist at all, make up one of the most common ways for employees to steal funds from a company. The scheme typically involves adding a new vendor into your system and sending fake invoices for products or services.
2) Payroll Fraud
Setting up “no show jobs” for friends or family members is another common way that company funds can be embezzled. This would generally require the perpetrator to have access to employee onboarding and payroll approval. These offenders would get all the benefits of employment with your company without doing any work.
3) Office Supply Theft
While somebody taking home some pens or food does not typically rise to the level of embezzlement, the theft of office supplies is something all companies need to have checks in place to prevent. One of the ways this can commonly work is ordering more supplies or goods than the company actually needs for normal operations and stealing the extra supply for personal use or sale.
3) Chargebacks and Refund Scams
Many ecommerce businesses are all too familiar with the pain of chargebacks and refunds. Customers increasingly demand the ability to return their orders and get a refund or they will buy from another company. This makes chargeback and refund scams a growing area of concern for all types of businesses. A common example involves placing orders, initiating a chargeback and never returning the items.
4) Bad Debt Write Offs
Schemes for bad debt write offs revolve around diverting customer payments to personal accounts and marking those customers as delinquent. The company assumes the customer has not paid their invoice and marks it as bad debt.
Warning Signs of Embezzlement
The common types of embezzlement start to leave traces of fraud and theft that savvy and knowledgeable business owners can spot. Here are a few examples of key red flags that must be properly addressed immediately:
1) Financial Discrepancies
Any important financial information or documents that are missing or inaccurate is an immediate and substantial warning sign of embezzlement or fraud. Anyone attempting to embezzle company funds will likely attempt to remove the evidence by getting rid of any related records and information. This can be as simple as a missing check or payment and as complicated as unbalanced financial statements. Do not accept quick explanations for any financial discrepancies in your company. Give these matters immediate attention and thorough review with independent accountants and auditors to avoid increasing risk to the company.
2) Payment Disputes
Whether a customer says they already paid their invoice and company records indicate otherwise or a vendor says they have not been paid for services rendered, these issues should be given prompt attention and executive review. They certainly can be solved by accounts payable or receivable in a large company, but any kind of pattern is an early warning sign that company funds could be at risk. Even a simple review with multiple parties within the company on a regular basis can help maintain customer and vendor relationships that are obviously valuable beyond spotting early signs of fraud.
3) Unexpected Reduced Profit Margins
Most business owners do not need a reminder to look into any shrinking company revenue or profits, but many might not be aware this can be an early warning sign of embezzlement. If the company continues to produce similar revenue with reduced profits, it is a good time to get detailed answers about the specific causes. It could certainly be the result of legitimate challenges or issues, but it can also point to theft or fraud upon detailed examination.
4) Inability to Cooperate with a Team or Share Key Details
Any employee that refuses to work with other coworkers on certain projects or initiatives hurts a company even if fraud is not taking place so it is worthwhile to review. It is also a common warning sign of embezzlement or fraud as perpetrators will likely look to perform their nefarious tasks without any scrutiny.
5) Unexplained Testing of Internal Systems or Request for Access
Those people with thoughts of committing embezzlement or fraud will often look for ways to test the internal systems they will need to fool before actually committing the crime. This could range from requests for access into a system outside their typical scope of work to probing questions about fraud prevention systems or processes in place. It would certainly be understandable to mistake this for a dedicated employee going above and beyond, but it can also be a red flag and sign of an attempt to defraud the company.
How to Investigate Embezzlement
Many business owners or executives can become angry and rush to take action if they find or suspect fraud against their company. This can often make matters worse. For starters, you could be wrong and the issue could be cleared up or resolved. Maybe it was genuinely a mistake or discrepancy. Publicly confronting one party can also alert other potentially involved parties that the scam is up and they will quickly delete any evidence that could tie them to the crime. This will only make it harder to completely resolve the matter and bring any offending parties to justice. It is essential that your company find experienced professionals to investigate and unravel any potential fraud or embezzlement.
Starting with an attorney well versed in white collar crime and embezzlement is the best way to resolve the matter without alienating innocent parties and risking the longevity of your business. A review of the situation and any warning signs or evidence will be able to determine what other professionals, like a forensic accountant or private investigator, could assist in resolving the matter. It also gives your business the best chance to make any necessary restitution and take appropriate actions to deal with any potential repercussions or liability.
Find the Best Attorney for Fraud or Embezzlement
RSN attorneys have represented individuals, small businesses and large corporations with an array of fraud and white collar criminal matters. Our firm can assist with every aspect of reviewing the potential case, working with other qualified professionals to document the evidence and alleged perpetrators, recommend potential strategies for resolution and damage mitigation, and defend your rights in civil and criminal court when necessary. The attorneys at RSN Law have been consistently ranked among the best in the country throughout our careers and we are prepared to assist with cases of fraud or embezzlement in Arizona. Call us today 480-712-0035 to schedule an initial consultation or make an appointment on our contact us page.
RSN Law intends this article to be for informational purposes, not to be relied on a specific legal matter, and does not create an attorney-client relationship.