5 tips for tackling the risk of embezzlement

In both good economic times and bad, embezzlement is a potentially costly issue for organizations. This form of occupational crime, which involves fraud or theft by trusted employees or managers, can range from simply stealing cash from a cash register or overstating expenses to complex schemes involving billing, inventory, payroll or intellectual property.

According to the Association of Certified Fraud Examiners (ACFE) 2016 Report to Nations, occupational fraud amounts to 5% of gross revenues for all businesses in a given year. The typical fraud lasts 18 months and 56% of the perpetrators in the U.S. were men, 46% women.

Because crimes of embezzlement involve trusted employees, they can carry on much longer without detection. These circumstances tend to be especially relevant to nonprofits and government agencies. Indeed, most embezzlers aren't antisocial, don't have criminal histories, and do possess stable family relationships and steady job histories.

Major embezzlement schemes involve forgery or unauthorized issuance of company checks often in concert with the creation of fraudulent bank accounts and fake vendors.

Although over the years the financial services industry has been hit the hardest followed by non-profits, embezzlement and other forms of occupational crime can affect any type of organization. Consider the following actual embezzlement cases:

In 2005, a 56-year-old female financial manager in a metropolitan-area county clerk's court office embezzled approximately $1 million in a 10-year period. A trusted and well-liked employee, she embezzled funds from a special account that pooled money from traffic fines, court registration fees and other revenues and concealed her crime by forging bank slips. She used the money to treat family and friends to lavish trips, and to help family with medical and other expenses.

In 2014, a 56-year-old male chief financial officer of a civil engineering company, pled guilty to embezzling approximately $2.5 million from his company more than eight years. The FBI found he used a great deal of the embezzled funds to pay the expenses for an exotic dancer, including plastic surgery.

In 2015, a 53-year-old female administrative assistant at a prestigious university pled guilty to embezzling more than $300,000 from the university over three years. She set up a PayPal account linked to her personal bank account and instructed approximately 185 students to pay their tuition and fees to the PayPal account. She used the money for personal expenses.

Today, with the potential to access corporate funds through the Internet, intranet and email system, risk managers are uniquely positioned — and need to be especially vigilant — to help their organizations prevent and thwart embezzlement and other forms of occupational crime.

Here are five steps to help in addressing these exposures:

1. Recognize the inevitable

Recognize the inevitable potential for a problem and get senior leadership's buy-in. Regardless of the type of firm and loyalty of its employees, occupational crime can strike any organization. The first step is to be realistic and convince the firm's leadership of the risk and the potential cost of such crimes.Regardless of the type of firm and loyalty of its employees, occupational crime can strike any organization. The first step is to be realistic and convince the firm's leadership of the risk and the potential cost of such crimes.

2. Form a team

Occupational crime is a criminal traumatic event requiring a SWAT type of response. Once leadership is on board, assemble a team of executives to deal with the exposure. In addition to risk management, the team should include members from legal, finance, internal audit, human resources, operations, information technology, and communications, as well as your firm's insurance adviser.

3. Ramp up detection

Actively promote your company's policy. Seek out training and newly developed data-analytics programs. Establish a zero-tolerance atmosphere and policy for occupational crime that comes from top management and communicate it frequently throughout your organization. Provide training to make employees aware of the threat of embezzlement and red flags, such as employees living well beyond their means. Establish a telephone hotline and online tipline for reporting potential offenses. Notably, the ACFE finds 49% of all occupational frauds are detected by hotlines and 39% by tips.

4. Establish and reinforce controls

Work with finance to tighten internal controls, such as segregating duties and establishing a structured system of approvals for accounts payable expenditures, restricted access to finance applications, a list of approved vendors, and protocols for crosschecking issued payroll checks against active employee listings. Make sure all employees with relevant responsibilities know what is expected of them to comply.

5. Know how to report an incident

Understand how your insurance policy will respond and the appropriate reporting procedures, including whether and when to involve law enforcement, which agency is best suited to handle the situation, and other appropriate authorities (such as prosecutors) to involve when reporting a crime. Be prepared to get help from a qualified and experienced forensic accountant if needed to quantify a loss. Consider a security consultant as necessary to make sure you understand the implications of reporting an incident to authorities and the appropriate law enforcement to involve.

Embezzlement and other forms of occupational crime can be costly. By recognizing the threat they represent and taking appropriate steps to manage the risk, organizations can increase their ability to catch offenders faster and prevent these incidents, altogether. At the same time, by engaging employees in identifying potential crimes, you effectively deputize them as guardians of the enterprise, which in turn can improve morale, elevate pride, and enhance productivity.

Tamara Hajjar is a senior property claims consultant with Aon Global Risk Consulting. She can be reached at [email protected].

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