EMBEZZLEMENT

Embezzlement is a form of fraud that involves misappropriation of money or property by someone who has been entrusted with it by virtue of their position or employment. Larceny and theft, on the other hand, involve taking, by trespass or force, money or property that belongs to someone else.

Depending on the amount of money or value of property involved, embezzlement is a misdemeanor or felony and a statutory crime punishable by fine and/or imprisonment. According to one profile, however, the typical embezzler is not usually prosecuted, usually does not receive a jail sentence upon conviction, and usually does not repay the victim or pay court costs.

An embezzler may be a public official or someone employed in a fiduciary capacity. Such a person is entrusted with funds or property by virtue of his or her position. When they use funds or property belonging to another person or business for their own account, they are guilty of embezzlement. While virtually any business can be the victim of embezzlement, the crime most often occurs in financial institutions, healthcare companies, and a variety of small businesses.

Examples of embezzlement include bookkeepers stealing from their employers' accounts by making false journal entries, altering documents, and manipulating expense records. Embezzlement may take the form of making payments to "dummy" suppliers and vendors. Employees of financial institutions may attempt to embezzle by diverting funds from legitimate accounts into "dummy" accounts.

The criminal act of embezzlement usually involves three distinct phases. At each stage the embezzler leaves indications that a crime has occurred; unlike many other crimes, however, there often is little hard evidence to indicate that a crime has been committed. The first phase of embezzlement is the criminal act itself, taking money or property manually, by computer, or by telephone. Once the crime has been committed, the embezzler attempts to conceal it. Making a phony payment, falsifying a document, or making misleading journal entries are some of the ways that embezzlers try to hide their crime. Finally, the third phase of criminal activity involves converting the stolen assets into cash and spending it.

At each step the embezzler is subject to detection. The act itself must be witnessed in order for the embezzler to be caught at the first stage. Concealment of the act results in altered records or miscounted cash that can be detected by auditors. Conversion usually results in lifestyle changes that can be noted by fellow employees.

In order to protect themselves from embezzlement, companies need to develop a program to recognize signs of employee fraud. One aspect of such a program is recognizing accounting irregularities. Embezzlers usually alter, forge, or destroy checks, sales invoices, purchase orders, and similar documents. Examination of source documents can often lead to the detection of embezzlement.

Internal controls are another important aspect of a fraud prevention program. A company's internal control system should be examined for weaknesses. Internal controls are designed to protect a company's assets. If they are weak, then the assets are not safe. Typical controls that help prevent embezzlement include segregating duties, regular or programmed transfers of employees from department to department, and mandatory vacations. In the banking industry, the Office of the Controller of the Currency requires that all bank employees in the United States take at least seven consecutive days of vacation per year. Many cases of fraud have been discovered while employees were on vacation and unable to cover their tracks.

Other recognizable signs of embezzlement include anything out of the ordinary, such as unexplained inventory shortages, unmet specifications, excess scrap material, larger than usual purchases, significantly higher or lower account balances, excessive cash shortages or surpluses, and unreasonable expenses or reimbursements. Finally, embezzlers often reveal themselves through noticeable lifestyle and behavioral changes. Embezzlers are often first-time criminals whose feelings of guilt cause them to act erratically and unpredictably. They usually spend the money they have embezzled rather than saving it. A successful fraud prevention program should include incentives for employees to report unusual behavioral and lifestyle changes in fellow employees.