Embezzlement is the fraudulent diversion of another’s property to a criminal’s own use. Partners, trusted employees, and even family members may be guilty of this crime.
Embezzlement often occurs because parts of your internal control systems are broken, and because someone got the idea that they should try to take advantage of this breakdown. Personal motives, like greed, often play a part, but many times it is just the wrong person in the wrong place, taking advantage of a clear opportunity.
When looking into a possible embezzlement, the Highest and Best Use (HABU) of your time should be your first consideration. In general, you should delegate to someone less expensive than yourself anything that is not the HABU of your time. In most cases, you cannot delegate to a member of your staff, because you don’t know who may be involved. In most cases you may have to go outside for the particular skills needed for the effective investigation of embezzlement.
When beginning an embezzlement investigation, remember to set clear objectives for the investigation, and to preserve every record and detail that you can. Preserve all the paper trails, reports, phone records, emails and correspondence of any person possibly involved. Written records of every relevant relationship may also be invaluable.
As you plan your investigation, always ask yourself “What will I do with the information that I develop ?” Because criminal prosecution is becoming increasingly rare, you should have a clear goal for the use of the information before you look into anything.
Making a rough initial estimate of the benefits and costs of the investigation may cause you to think that the investigation is just not worth the time, cost and trouble. On the other hand, some organizations want it widely known that thefts and embezzlement are just not tolerated, and these wise organizations do what it takes to deter such crimes.
Two conditions are almost always present before every theft or embezzlement. First, a single person is responsible for every part of one process (such as check writing and bank reconciliations). Second, the fear of discovery and punishment is low (usually because of generally lax leadership).
Two steps can be taken to lower your risk of becoming a victim of a financial crime. Always have at least two people involved in each major business process, and switch off these assignments on a regular basis. No notice inquiries (and/or inspections) also increase the likelihood of discovering financial problems. Both of these steps should be supported by complete documentation of every major business process and function.
Perhaps the most obvious clue to a potential embezzlement is documentation that is missing or late. Late status reports and late bank statements are frequent examples. With today’s sophisticated document imaging systems, re-created (and false) statements are becoming more common.
Another common indicator is the “dedicated” employee who works late and rarely takes vacations. This employee may be trying to stay on top of the daily details of their crimes, and they may fear discovery by another employee. Many of them often have to maintain physical control of the documents they use in their endeavors. Some go so far as to keep blank checks and blank invoices in their locked desk drawers.
When the potential embezzlers suspect that something is going on, you have to act quickly and ruthlessly. If the suspects are left alone with key information, they may have time to destroy the proof of their crimes. By using an outside embezzlement investigator, you have an extra resource (1) to act quickly and effectively, and (2) to do some of the more unpleasant tasks in such investigations.
Regular reviews of your own financial control systems are a very useful preventive step. Qualified bookkeepers and CPAs can help you do this. After a successful investigation, your investigator can also debrief you on the “barn doors” to close before the next “horse” escapes.
