Ever get that nagging feeling that something’s just not right with your business finances? Maybe the numbers don’t quite add up, or perhaps a trusted employee is suddenly sporting a new luxury car. While it’s easy to brush off these concerns, ignoring them could cost you dearly. Embezzlement, the fraudulent misappropriation of funds by someone entrusted with them, is more common than you might think.
As an accountant I’ve run into several cases of embezzlement. Often an employee does not really plan to embezzle. Instead they often “borrow” money from employers with the intent of paying them back. This often is due to some financial stress, sometimes caused by gambling or addictions, for instance. But once they realize how easy it is, they often keep doing it.
Unfortunately we saw this at a local Vancouver-area youth sports league. The treasurer had no oversight and is accused of using league funds to pay personal expenses.
Unfortunately this often happens right under your nose, perpetrated by people you least expect.
Let’s break down the telltale signs of embezzlement and what you can do to protect yourself.
Red Flags in the Accounting Department (Where Else?!)
- Unexplained discrepancies: This is the big one. If your books are showing inconsistencies, missing documentation, or altered records, it’s time to dig deeper. Things like frequent accounting errors, inconsistencies in cash flow, or unexplained inventory shortages can all be warning signs.
- Changes in employee behavior: Has a once-reliable employee become evasive, defensive, or secretive about financial matters? Do they seem to be living beyond their means? These behavioral shifts can be red flags.
- Refusal to take vacations: Embezzlers often avoid taking time off, fearing that their absence will expose their fraudulent activities.
- Too much control: Be wary if an employee insists on handling all financial tasks themselves, refusing to share responsibilities or allow oversight.
Beyond the Balance Sheet: Lifestyle Clues
Embezzlement isn’t always about numbers. Sometimes, the signs are hiding in plain sight.
- Lavish lifestyle: Is an employee suddenly flashing expensive purchases, taking extravagant vacations, or driving a fancy new car they can’t reasonably afford on their salary? While it’s certainly possible they won the lottery, it’s worth investigating further.
- Financial stress: On the flip side, an employee experiencing financial difficulties might be more tempted to dip into company funds.
What to Do If You Suspect You Are Being Embezzled
Suspecting embezzlement can be a gut-wrenching experience, especially if it involves someone you trust. But taking swift action is crucial.
- Gather evidence: Don’t confront the suspected individual just yet. Instead, start documenting any suspicious activity. This might include reviewing financial records, bank statements, and expense reports.
- Seek professional help: Reach out to a forensic accountant or fraud examiner. They have the expertise to conduct a thorough investigation and uncover any wrongdoing.
- Contact your attorney: Legal counsel can advise you on the best course of action, which may involve law enforcement or civil litigation.
Prevention is Key: Safeguarding Your Business
The good news is that you can take steps to prevent embezzlement in the first place.
- Internal controls: Implement strong internal controls, such as multiple signers on checks, review of cashed checks, segregation of duties, regular internal reviews of bank and credit card statements, and mandatory vacations.
- Background checks: Conduct thorough background checks on all employees who handle finances.
- Employee training: Educate your employees about fraud awareness and ethical conduct.
Remember, at Lewis Group CPAs, we’re not just number crunchers. We’re your trusted advisors, dedicated to helping you navigate the complexities of business ownership. If you have any concerns about embezzlement or want to strengthen your financial safeguards, don’t hesitate to reach out.
Need help with a financial issue? Contact Lewis Group CPAs today at (360) 896-8221 or visit our website at https://lewisgroupcpas.com/contact/ to schedule a consultation.
