Embezzlement within an organization: Determining if theft is taking place
Over four years, a Sacramento Kings executive funneled more than $13 million in team sponsorship money into a shell company, using the funds to buy prime California real estate. After finally getting caught, Chief Revenue Officer Jeffrey David was sentenced to seven years in prison for wire fraud and aggravated identity theft.
So, what did David do to keep his scheme going? He created an LLC and sent sponsorship money to a bank account under his sole control. He also forged the signatures of other Kings executives — including the then-president — and used the money to buy and remodel homes, pay the expenses of family members, and even purchase a private jet membership.
The Kings story shows that embezzlement itself does not always follow a particular “steal from the register” type of pattern. For Microsoft in 2017, it was the theft of 62 Super Bowl Tickets intended for employees, which were sold online for hundreds of thousands of dollars. For New York’s Municipal Credit Union from 2013 to 2018, it was the submission and payout of invoices for hundreds of thousands of dollars in dental work — by the CEO — that never actually took place.
Embezzlement can happen at large companies like the Sacramento Kings and Microsoft, as well as Walmart and the U.S. Postal Service, but it also happens at medium-size enterprises and small businesses. If you suspect someone is stealing from your company or organization, here are some tips to understand it better.
Embezzlement often starts with employee behavior
Experienced criminals are often extremely disciplined at hiding what they’re doing. From a behavioral standpoint, you might never know they were embezzling money.
But an embezzling employee at your own company likely doesn’t fall into that category of elite criminals, so they’ll probably be a bit easier to spot, if you know the signs. Many embezzlers:
- Face financial hardship
Is the employee or accountant struggling to pay their bills? Do they have a gambling problem? Do they have a new baby or are they facing an expensive divorce? Personal financial problems sometimes lead to a temptation to steal, so pay extra attention to these types of behaviors.
- Are over-protective and secretive with their work
Does the employee or accountant insist on working solo? Do they routinely shut down questions about their work? Are they secretive about their work process? If you come across an employee in charge of inventory or accounting who tries to shield their work from others, consider this a red flag.
- Try to cover their tracks
Have you asked an employee for a basic record of transactions only to be told that the files are corrupted or the employee accidentally deleted what you’re looking for? An embezzler will do many things to hide the evidence. If an employee can’t deliver the records you’re asking for, it’s time to dig deeper.
- Live large
You know how much your employees make, and probably even suspect how much their spouses make. If an employee with a modest salary suddenly buys an expensive car, parties at trendy clubs, or splashes out on a luxury family vacation, they may be embezzling funds.
- Avoid vacations
It’s one thing if an employee feels too overworked or too busy to take a vacation. It’s something else if the employee refuses to take a vacation because they’re afraid that someone else will see their work. If the person in charge of your books can’t even fathom having someone else take over while they’re gone, they might be hiding something.
- Feel underpaid / underappreciated
The disgruntled employee who speaks loudly and frequently about their low paycheck, or how your company is doing them wrong, can sometimes be tempted to embezzle. Taking a little bit of money here and a little bit of inventory there may be their way to pay themselves back for perceived wrongdoing.
These behaviors do not automatically mean that an employee is stealing money from their company. However, if you’re noticing a combination of these behaviors, you should definitely cross-reference your books for discrepancies.
The technical side of embezzlement
Beyond the behavior patterns of your workers, what does embezzlement look like from a technical perspective? What are some of the things you should look for when you open your books or dig into the financials? Here are some red flags:
- Payments to new/unknown vendors or employees
One of the most common ways to embezzle money is to use the vendor method. An embezzler will often add family members or friends to a company’s vendor list, and pay them for fake goods or services rendered. They may also use their own fake company to collect payouts. By checking your vendor list frequently, you might be able to spot the new and suspicious vendors right away.
- Using general accounts or “other” expenses
Another method is to hide expenses under the umbrella of “other,” or “general.” By using these vague categories to describe expenses, employees often slip by without providing paperwork that shows the exact nature of what they’re getting reimbursed for. Look for a higher number of reimbursements that fall into these nebulous categories.
- Busted budgets
If you’ve set a budget to track expenses and find that your team has gone way over, it’s possible that if embezzlement is happening at your company, you’ll find it here. Ask for a deeper explanation of why your team went way over budget, alongside receipts that back up the explanation.
- A huge number of adjustments
Is your ledger showing a large number of adjustments? Are you seeing shifts in dollar amounts or a surprise number of changes where money is being moved around to other places? Most people who embezzle want their trail to be windy and confusing. By reviewing your general ledger and looking at the number of dollar adjustments and changes, you may see something unusual that’s worth exploring.
- Strategically priced invoices
People who typically embezzle funds know the exact amount that triggers having a manager approve or sign off on an invoice. If the threshold is $2000, a large number of invoices might max out at $1,995 or other amounts just under that threshold. Look for invoices that get close to your threshold, but don’t reach it.
Other things to look for: disorganized or messy bookkeeping, delayed deposits, checks with odd signatures, or even large credits to one particular customer — who is most likely a friend or family member of the person pilfering the funds.
One key to preventing embezzlement is making certain that one particular person isn’t in charge of both processing transactions and making records of transactions. When that happens, it’s akin to putting the fox in charge of the hen house.
If you’ve seen any of the signs above and you’re getting an uncomfortable feeling that theft is taking place, work with an attorney and investigator to build a case. You want all the evidence you can get before you accuse or terminate an employee, or take them to court to recover your losses.